There are no easy answers for Eircom's shareholders. The company is now asking them to approve the takeover of its mobile subsidiary, Eircell, at an extraordinary general meeting next month. This would leave them with shares in Vodafone and separate shares in what is left of Eircom; together these will be worth substantially less than the £3.90 paid for the shares when they floated on the market. Eircom has indicated that its strategy following the sale of Eircell will be fixed on retrenchment and cutting costs as it concentrates on its core fixed line business, a direction which does not appear to hold out the prospect of significant growth. It is an extraordinary change of direction, albeit one largely brought out by a major shift in sentiment towards the new media and telcommunications sectors. When it floated the company was holding out the prospect of growth in mobile, multimedia and its overseas operations. Now it is selling off its mobile arm and significantly scaling back its multimedia and UK operations.
In common with many other companies in the sector, Eircom appears to have misjudged the opportunities presented by the Internet and new media and is now unsure how to grow its business in future. The danger is that its board and management are being pushed into a short-term response to market pressure, rather than aiming to build long-term value. The mobile arm now looks certain to be sold, as Eircom's big overseas shareholders are lined up behind the deal. The value to shareholders of the proposed Vodafone purchase of Eircell will depend on the price of the UK company's share when - and if - the deal is done.
At yesterday's trading value, Eircom shareholders would receive £1.57 worth of Vodafone shares for each Eircom share. The remainder of Eircom may be valued at around £1.00 to £1.10 per share. The sum of these two parts - about £2.57 to £2.67 per share - is still well short of the £3.90 flotation prices. Vodafone appears to be paying a reasonable price for Eircell, given the current valuations in the market. The question is whether Eircom would be better served holding on to Eircell, which has grown strongly in recent years, in the hope of a revival in the sector? For shareholders, holding shares in Vodafone will, however, give them exposure to the mobile sector and, perhaps, some lift in their fortunes when sentiment improves.
What of the outlook for Eircom's remaining businesses? The company is frank in pointing to the competitive pressures in its core fixed line market. Given this outlook, it is hard to see where growth will come from, although some recovery in sentiment towards the sector could help the share price. Shareholders looking for a quick return will hope that a bidding battle breaks out between Mr Denis O'Brien's e-island company and a consortium led by Mr Dermot Desmond for the rest of Eircom. Neither has yet lodged a firm bid. If the non-mobile businesses are not bought out, then the value of the shares will depend on how successful management is in guiding the company and on international sentiment towards the shares. The market background may improve for Eircom, but its board and management have still to show that they can lay a foundation for growth and improving shareholder value.