What happened this week to drive Eircom shares up from €2.77 to €3.30?

Three things happened this week, the most significant of which was the emergence of Mr Denis O'Brien as a bidder for Eircom Ireland, the core fixed-line business of Eircom. It was quickly followed by the news that Eircom had moved significantly closer to the sale of Eircell - its mobile business - to Vodafone. Eircom and Vodafone are now in exclusive talks and a deal could be done within two weeks.

Underlying these events was a general pick-up in telecom shares across Europe after the Italian government failed to get anything like as much as it expected when it auctioned five new mobile phone licences. This had the paradoxical effect of pushing up telecom shares because it was seen as a sign that sanity has returned to the telecoms market.

The two bids for parts of Eircom have had the effect of crystallising the value of its shares. Vodafone's bid will be worth €2.30 a share and the O'Brien consortium offer is worth an additional €1 a share. The remaining parts of the business are valued at €0.37. Together this comes to €3.67, below the €3.90 flotation price but still ahead of the market prices, a reflection of the risk that the various deals could still fall apart.

What is going to happen next?

The talks with Vodafone continue apace and should be completed within weeks. An announcement is expected within a fortnight ahead of the company's interim results next month. The negotiations with Mr O'Brien are at a much earlier stage and the Eircom board is expected to hold out for a higher price, although Mr O'Brien and some market analysts say he is offering a very full price.

Both deals will have to be approved by shareholders at a general meeting because of the size of the businesses being sold relative to the company. Those meetings are not likely to be held before December.

What could go wrong at this stage?

The board of Eircom has not yet formally agreed to sell anything. The fact that it has agreed to exclusive negotiations makes it unlikely it will pull out of the Eircell sale. Vodafone equally is considered unlikely to withdraw and indications are that both sides are happy with the €5.1 billion price tag put on the mobile company.

The situation with Mr O'Brien is much more delicate. The board of Eircom may decide not to enter into serious negotiations with Mr O'Brien at all. Conversely, it could tie up a deal within weeks. The expectation is that it will reject his initial offer and hold out for more.

What should I do now?

The current share price is at a discount to the value put on the shares by the proposed break-up. This reflects the fact that there is a chance that it might not happen in the end and, if you can't take that risk, you might be tempted to sell. If you hang on over the next few months, you might get a return of more than the €3.90 per share price paid by most small investors. The most likely source of this is an increased bid from Mr O'Brien.

In addition, if you hang on until the Eircell sale is complete you can expect to receive one Vodafone share for every two Eircom shares. Many investors may have had enough of the stock market at this stage but Vodafone is one of the largest companies in the world and its shares have to be a better bet than Eircom.

If I don't sell now, when will I get some money?

You can expect to get your Vodafone shares early next year. How you will receive the benefits of the sale of Eircom Ireland to Mr O'Brien is not clear. His consortium is paying cash which could be distributed directly to shareholders by way of a special dividend. Alternatively Eircom could hold on to the €2.2 billion for a while. It would then be reflected in the share price, but at a discount.

Should I have bothered taking part in the flotation?

There is a reasonable prospect at this stage that, within a short time of the breakup of Eircom, you will have cash and shares totalling more than €3.90. For this to happen Vodafone's share price will have to remain healthy, Mr O'Brien will have to put his hand deeper into his pocket and the stock market will have to look favourably on the collection of multimedia businesses that remain.

None of the above is a certainty.