Sunday, April 22nd, Dublin Airport: Cold, damp, and depressing. How wise to have a "quickie" in Lanzarote away from inflation, IT gurgles etc. Monday, April 23rd, Lanzarote: Nestling in the warmth off the North African coast. 7 a.m.; Flick, flick, only one English language station, CNBC, on the host of TV stations. The voice was clear: "well-known businessman, Tony O'Reilly [Sir Anthony to us] and George Soros", the international financier, had formed a consortium to make a €2.7 billion (£2.1 billion) bid for Eircom after the mobile phone side is sold to Vodafone. That item dominated the CNBC news for much of the morning. And it continued to be mentioned for a few days afterwards. The commentators concluded that the price was on the high side for a fixed-line phone operation. But the investors' interest in Eircom had demonstrated that following the slump in the share price, there was now potential upside value. If a multiple of five to six times' EBITDA (earnings before interest tax, depreciation, amortisation) is used then the suggested takeover price does not appear to be too toppy. Using the anticipated EBITDA of €445 million, for the year to end March 2001, and adding in the €30 million non-pay cost savings in the pipeline, puts a value of €2.85 billion on the group (ex-Eircell), on a six-multiple.
This comes down to €2.38 billion on a five-multiple. Going on these figures, the indicated offer of around €2.4 billion , or €1.10 per Eircom share, by Mr Denis O'Brien's eIsland consortium, looks on the low side. But the reaction by Mr O'Brien to Sir Anthony O'Reilly's approach, at this early stage (no formal bids have been made, and are unlikely for some time), was surprising. First, he accused the O'Reilly consortium of being foreign-driven (it is being put together by Goldman Sachs), with "already having one foot in the departure lounge". Yet his consortium is backed by foreign banks.
He also introduced ageism into the debate, saying Sir Anthony is almost 65 and winding down some of his businesses, while he was only (my italics) aged 43 and actively looking to re-enter the telecoms business, after selling Esat to BT last year. That is hardly an acceptable argument; are there not many older business people making very shrewd business decisions based on their experience?
There are now three groups - the third is financier Mr Dermot Desmond - interested in Eircom (ex-Eircell) but as has already been highlighted, the Eircom Employee Share Ownership Programme Trustee, which owns 15 per cent of Eircom on behalf of the employees, could be a major stumbling block. It not only wants to stay in, but also to increase its stake. Venture capitalists need to have a clear exit channel. Ideally, they could buy Eircom which will have no debt, then gear it up using the Eircom debt to pay off a large chunk of the consortium's debt. That could hardly be done with the employees' trustee holding a block of shares. While that is all down the line, the Vodafone bid for Eircell is not.
This seems certain to go ahead. Comsource (KPN and Telia) with a 35 per cent shareholding has given irrevocable acceptances. Most of the institutional shareholders - they own 15 per cent - are expected to say yes. The offer represents 28.2 times' Eircell's EBITDA for the year to March 2000 and €2,391 per Eircell customer. That seems fair enough on historic grounds but does not take potential growth into account. With Eircell continuing to show strong growth the multiple would be less for 2001 and 2002. And with a mobile penetration of some 68 per cent in the Republic, there must be scope to increase this to 75 per cent plus. But on the downside, more competition is looming for Eircell.
On balance shareholders should accept the Vodafone offer because the alternatives hardly breed confidence. And what about Vodafone's future? Unlike BT and many of the other big players, it has very little debt. Out of its £151 billion sterling (€242 billion) in fixed assets, £22 billion are intangibles, reflecting a premium paid on acquisitions, and the bulk, some £122 billion, is in investment, reflecting joint ventures and associated companies.
It will have to squeeze value out of these. Vodafone expects to make further strong growth this financial year with contributions from recent acquisitions and better margins. US brokers are estimating 28.6 per cent growth in earnings this year (end March 2001), 16.7 per cent in 2002, and an average of 16.5 per cent over the next five years. Curiously they have a target share price of $31 (€34.7) which is close to the present US price. Four are recommending a buy, one a buy/hold, one a hold and one a sell.
Most UK brokers are also recommending a buy. And while analysts at Goldman Sachs have lowered their price target from 320p sterling to 300p sterling, that is well above this week's price. And Vodafone's prospects look considerably brighter than Eircom's.
Bill Murdoch's column appears on the first Friday of every month. bmurdo@irish-times.ie
