Vodafone Buys Eircell


The focus of interest in the Vodafone takeover of Eircell will be on what it means for shareholders. They will now receive Vodafone shares worth €1.84 - at yesterday's closing price - for every Eircell share they hold. They will also retain their shares in Eircom, which will reflect the value of the remainder of the business. They will not recoup their original investment of €3.90 per share - in the short term, at least.

The story of Eircom since privatisation raises some fundamental issues. A key part of the business is being sold off and a complete break-up of its assets is possible, if a consortium led by Mr Denis O'Brien - or some other group - bids an acceptable price for the fixed-line assets. It is a far cry from the hoopla when the company was floated and investors were offered a share of a growing Irish telecommunications business.

The Eircell sale could be seen as part of the inevitable consolidation of the international mobile telecommunications industry. Indeed, the Eircom board argues it is selling Eircell at a good time. It argues that if it remained as an independent operator in a small market, it would suffer in the coming wave of consolidation.

However there must be a danger that Eircom has been pushed into a short-term response to investor criticism and to uncertainty about its own strategy. A part of its business seen a few months ago as central to its growth prospects has now been sold. The decision to sell this high-growth part of its business is risky and only time will tell whether it has received a good price. The company says it will now concentrate on managing its fixed line and multimedia businesses. If it is to win confidence in this approach, it must quickly set out and articulate a growth strategy - something it has not done to date. Eircom's shareholders will now receive Vodafone shares, the price of which will be influenced by overall trends in the telecoms sector and by the performance of Vodafone management. The outlook is unsure, as major international telecoms companies, including Vodafone, have paid out large amounts for new mobile phone licences and will have to fight hard if they are to get a return on these investments. The fluctuations of the sterling to euro exchange rate will also affect the value of the shares for Irish holders.

Whatever its short-term future, mobile telephony will be an enormously important part of the future of the telecoms sector. It will now be controlled in the Republic by two major international groups - Vodafone and British Telecom. In the long term we may look back on this as an inevitable part of an international trend towards consolidation. But it was surely the last thing the Government intended when it planned the privatisation of the then Telecom Eireann.

With the benefit of hindsight, it is now clear that Eircom shares were overpriced when floated - as its management correctly argued at the time. Since then Eircom management have faced huge pressure from shareholders; in fairness to them it must be pointed out that the decline in share price has been experienced by just about every company in the sector. Now, if they are to retain control of what is left of the business - and build value from this part of the company for its shareholders - they need quickly to demonstrate that they have a credible plan for its development.