There may be some hope for Eircom shareholders if the company negotiates the sale of all or part of its mobile phone subsidiary, Eircell.
Eircom has confirmed it is in negotiations "which may or may not lead to the disposal of all or part of Eircell". Those negotiations are under way with the UK mobile phone giant, Vodafone.
The value of Eircom shares has already risen, even though no deal is yet agreed. In early trading yesterday, the shares rose to €2.83 before slipping back to close at €2.75, 11.8 per cent up on Friday's price.
But there is still a long way to go before shareholders who paid €3.90 for Eircom shares when they were floated on the stock market in July 1999 can expect to recover their investment.
Vodafone's interest in Eircell is good news for Eircom shareholders. At the very least, it could flush out interest from other possible partners or bidders. France Telecom's Orange subsidiary could decide to enter the fray. Wider interest in Eircell would help push up the price Eircom could get for its mobile subsidiary.
Shareholders should benefit initially - they will probably get shares in the acquirer or a cash payout from Eircom if a deal is agreed. Eircom will be left with its more slowly growing fixed line and multimedia business, which will have to be managed astutely if their potential value is to be achieved. All or part of these businesses may eventually be sold off too.
But if no deal emerges, Eircom shares could plummet to new lows. What is behind the latest moves and how will they affect shareholders?
What is Eircom doing?
Eircom is negotiating the sale of all or part of its subsidiary, Eircell, to Vodafone, the largest mobile company in the world. Negotiations have been going on for about six weeks. While Eircom is negotiating with Vodafone, it is still open to approaches from other potential bidders for the mobile operations. And it is possible that a bid for the entire company could emerge.
What is Eircell?
Eircell is Eircom's mobile phone subsidiary. Set up in 1985, it has grown rapidly and is the dominant player with about 60 per cent of the Irish mobile market and over 1 million subscribers. It is highly profitable, producing profit margins of about 30 per cent and is widely regarded as a well-run business. Market analysts reckon that Eircell accounts for about 75 per cent of the total market value of Eircom.
Why would Eircom want to sell a star performer?
For some time Eircell chief executive Steven Brewer has been adamant that his company needed a strategic partner to enable it to continue its rapid growth and to provide a cost-efficient service to customers, particularly those using their Eircell mobile phones in Britain and Northern Ireland.
While Eircom may have been more interested in finding a strategic partner, Vodafone appears to be more interested in a full acquisition. And a full sale of Eircell now makes some sense. Eircell is now arguably at the peak of its value - its 60 per cent market share is only likely to fall with increasing competition from new entrants to the market and its margins are falling for the same reason.
So selling now makes sense in terms of getting the best price possible for Eircell. But it means Eircom will be completely out of the fast-growing mobile phone market. And because it is considering the sale of Eircell, it is clear Eircom is reassessing its entire telecommunications operation.
What is the outlook for the Eircom share price?
Already the Eircom share price has risen because of the speculation. The market is looking at the possibility that the sale will generate a good price for Eircell. Most analysts expect that Eircell will raise upwards of €4 billion in a full sale. This would be about 6.7 times Eircell's sales. While this would be a discount to the European mobile phone sector, this would be expected on the basis that Eircell is a relatively small company operating in a small geographical market.
If Eircom agrees a good deal for Eircell, the share price should continue to improve. But the market will keep a wary watching brief to see how Eircom proposes to manage both its remaining businesses and the cash or shares it gets through the sale of Eircell.
However, if no deal emerges, Eircom shares are likely to fall sharply.
What will Eircom have left if Eircell is sold?
Eircom will be left with its less valuable and more slowly growing business - its fixed-line operations and its multimedia business.
In the fixed-line business, the company is facing increasing competition, with its market share down to 85 per cent from about 100 per cent two years ago. Profit margins are falling as the company cuts prices in the face of new competition. It needs to make significant investment to upgrade its lines to provide the high speed interactive Internet/video/TV service that its competitors are preparing to offer.
Eircom was already considering the flotation of its multimedia operations before the Vodafone negotiations began.
What will shareholders get out of the deal?
In a best case scenario, if the Eircell sale goes ahead and Eircom gets about €4 billion for the operation, what shareholders will get will be decided by the Eircom board.
If the board decided to return the full sale proceeds to the shareholders, they could get a payment of €1.80 for each share they now hold. But the size or shape of any payout would depend on how the deal is done (see below) and whether a tax-efficient payment scheme can be arranged.
Shareholders will also keep their Eircom shares, the value of which will depend on the market's assessment of the ability of the Eircom management to successfully drive the remaining businesses forward.
What will that be worth?
Current estimates value these remaining businesses at around €2.20 per share.
So, if the deal goes ahead shareholders could be looking at a value of about €4.00 per share - a €1.80 payback from the Eircell deal and a €2.20 per share value on the remaining business. However, given the uncertain future environment, these values could turn out to be off the mark.
How would the deal be done?
Most market sources expect that any Vodafone deal will involve shares - that is Vodafone would pay for Eircell through the issue of Vodafone shares to Eircom shareholders. The number of shares issued would depend on the price agreed for Eircell. Eircom shareholders would then have Vodafone shares as well as their existing Eircom shares which would be worth less after the removal of Eircell from the company.
Should I sell my Eircom shares now?
It depends. First, it depends on what price you bought in at. If you bought in around the €2.40s, you are already looking at a paper profit with the price now up to €2.75 and might want to realise some of this. But with the company, or at least part of it, now "in play" the sharp price may continue to rise.
If you bought in around the €3.90 flotation level, you are still very much in negative territory. What you should do now depends on whether you think Eircom can make a good deal on Eircell and can push forward its other businesses. If you don't think management can deliver, you might watch the shares carefully in the coming weeks and pick a good time to cut your losses and sell.
But if you are confident in the management and its latest strategy you should hold on and hope for the best.