Current Account has previously thought that the Vodafone deal to buy Eircell was a good one. After all, wouldn't Eircom shareholders be better off realising some of their investment by getting Vodafone shares in exchange for Eircell. After all Vodafone is the biggest British company and has interests all over the world. At least that's the theory.
It has now come to the stage where the Eircom board should take the fateful decision and scrap the sale of Eircell, even if that means that Denis O'Brien's bid for the fixed line business is then withdrawn. Events have now changed to such a radical degree that Eircom would probably be better off staying as it is, trading through the difficult period ahead, and then look for a buyer once again when it is in better shape to be sold.
Given the negative reaction from the markets - especially telecom and technology stocks - to the Fed's caution on interest rates this week, there is a strong body of opinion that it will be some considerable time before telecom stocks are back to valuations that would make the Vodafone bid for Eircell attractive.
The Vodafone/Eircell deal was announced when Vodafone shares were trading at 245p sterling. Since then they have gone downhill, and after the Fed move hit markets this week they were firmly back below 200p. That means that the value of the deal to Eircom shareholders has fallen by almost 20 per cent. That fall is too much for Eircom shareholders to accept and they should vote against the proposal to sell Eircell at this time.
Sadly, KPN's need for money means that obtaining the 51 per cent needed to sell Eircell is a lot easier than it would otherwise be. And the likelihood is that if the Eircom board supports the sale - even at a price well below the level where it could walk away from the deal without penalty - then the sale will go through.
If the Eircom board does, however, take the courageous decision and decides that the Vodafone offer no longer represents real value, then Chris Gent should be told to increase the offer or walk away. If that means that Eircom's Dutch and Swedish "strategic partner" shareholder are left high and dry with shares they do not want, then so be it.
Remember, despite its current low rating in the market and its high cost base, Eircom has one advantage over many of its peers: it has very low debt. With BT, Orange, Vodafone, et al awash with debt, Eircom has a balance sheet that most telecom companies in the sector would be delighted with.
Eircom might have a lot problems to solve over the next few years, but so does Vodafone. Would you really be better off with Vodafone shares?
