Investor:  An insiders guide to the market

After spending most of October in the doldrums, the British equity market sprang back into life earlier this week in response to a new wave of merger and acquisition (M&A) activity.

By far the biggest of these was the agreed bid by Telefónica of Spain for O2. If the deal is successfully completed, it would make Telefónica the second largest quoted international telecom group by market capitalisation, just behind Vodafone.

The price offered of 200p per O2 share in cash puts a value of £17.7 billion (€26 billion) on the takeover. This makes it the second biggest cash deal in the past 10 years, behind the Cingular acquisition of AT&T Wireless in the US.

Other British companies where approaches have been made include the shipping company P&O, the glass manufacturer Pilkington and the construction company Mowlem.

Shares in football clubs have also come under the spotlight with the announcement by Aston Villa that it had received an approach from a syndicate that includes several Irish businessmen. According to Dealogic, the data provider, 512 deals worth £67.4 billion have been announced so far this year in the UK, which is the highest figure since 2000.

This surge in M&A activity is at least partly explained by a big improvement in the balance sheets of European companies over the past three years. Successful restructuring and cost control have enabled many European companies to amass large amounts of cash on their balance sheets.

Some of this cash is going into shareholders' pockets by way of higher dividends and share buybacks. Some of it is being used by acquisitive chief executives and boards to acquire other companies.

This recent bout of takeover activity does not have any direct implications for the Irish market. However, it has brought a number of quoted companies into the spotlight. The approach by Dubai Ports for P&O has relevance to Irish Continental Group (ICG).

P&O is now primarily an owner of ports as a result of a restructuring programme begun in 1999. The company's container ports generate virtually all of its profits and absorb the bulk of investment spending. As such, the eventual price paid does not have direct relevance for the valuation of ICG.

However, given that Dubai Ports is mainly interested in the ports assets, a successful takeover could lead to the eventual divestment of P&O's ferry operations, which could be of interest to ICG.

ICG's share price has under-performed the Iseq index by 15 per cent this year due to difficult trading conditions and labour relations problems.

If the company can resolve its labour relations issues, the potential for corporate action could then lead to an improvement in investor sentiment towards the stock.

Heavy buying of Eircom shares during its rights issue offer period led to speculation that Swisscom was preparing to bid for the company. As it turned out, an Australian-based investment company Babcock & Brown invested in Eircom as a long-term portfolio investment.

As a result, the share price came off the boil, but when the news of a fresh approach from Swisscom broke on Wednesday, it sent the shares up to €2.44. They have come back somewhat since as the market remains unsure as to the timing of any bid, or whether one will actually materialise, given Swisscom's involvement in the bidding for TDC, the Danish telco. In addition, the Swiss have been to the altar several times in the past few years, but failed to get married.

Investor's view is that Eircom was fully valued on strict investment grounds at €2. At that price, Eircom traded on a price earnings multiple of 12.5 and offered a dividend yield of 5.6 per cent.

Although total earnings will grow over the next two years, earnings per share are forecast to decline because of the big increase in shares issued to fund the Meteor acquisition.

In addition, the fact that the second-largest player in the Irish mobile market now has a new owner could make it more difficult for Meteor to achieve its targeted market share gains.

The news that Swisscom now appears prepared to pay well above the €2 level for Eircom supports the view that the current high volume of European M&A activity will continue to have a positive impact on the Irish market for the foreseeable future.