The battle for Eircom

There's a battle raging over Eircom. But beside the dramatic bids and counter-bids of the consortia vying for control, what can the state of the Irish incumbent telco tell us? Justin Madubuko investigates...

Nobody can say Eircom is short of attention these days. The company has received bids from Valentia, a consortium led by Irish media mogul Anthony O'Reilly, and one from rival entrepreneur Denis O'Brien, head of e-Island, and former boss of Eircom rival Esat.

e-Island made its initial bid for Eircom in February 2001. It offered E2.4bn (£1.47bn).

Valentia approached Eircom in April this year with a view to buying its entire issued share capital, at the time worth between E2.6bn (£1.6bn) and E2.7bn (£1.66bn). The Valentia consortium comprises telecoms investment firm Province Equity Partners, Soros Private Equity, and investment banks Warburg Pincus and Goldman Sachs.

The bids were triggered through the sale of Eircom's wireless operation Eircell, to Vodafone for E4.5bn (£2.76bn) in December 2000. Key shareholders in Eircom, Swedish and Dutch operators Telia and KPN, joint owners of 35 per cent of the telco, made it clear they welcome any offers for the Irish incumbent. KPN is among several large telcos to have announced plans to sell off assets to cut debts.

Yet against this background, Eircom has seen a steady decline in its shares, beginning not long after it made them available to the Irish public in 1999 for E3.90 (£2.40) per share. As a result of its poor stock market performance the company has been under pressure. Shareholders have said they are unhappy with the direction the company is taking.

Lars Godell, European telecoms analyst at Forrester Research, reckons Eircom - knowing it needed huge investment in its fixed and mobile networks - saw the next stage of the company's development as too much of a challenge for a small, isolated incumbent.

For one thing, the last two years have seen mobile operators facing a decline in average revenue per user (ARPU). Godell said: "You have to be big to survive and small players like Eircom have had to get together with bigger players out there, such as Vodafone."

Few analysts disagreed with Eircom's decision to separate its fixed and mobile businesses with the Vodafone deal, but the move makes investing for the future difficult.

Forrester's Godell said the long-term solution is for vertically integrated operations including fixed and mobile services, retail activities and innovative offerings based on a mix of these. This may be difficult given the Eircell sale, but he pointed out Vodafone will likely want to play ball because it too "cannot consolidate on one solution".

In addition to strategy, it's clear shareholders hold the key to the future of Eircom. Their votes will decide whether e-Island or Valentia captures the company. Valentia already has the backing of Eircom's Employee Share Ownership Trust (ESOT), which owns 15 per cent of the company, as well as the vote of Comsource, the KPN-Telia joint venture.

With Eircom employees owning such a large shareholding it is unlikely any bidder could broker a successful acquisition without the backing of ESOT - this is where the real deal to buy the company will be made.

e-Island requires 80 per cent of all shares in Eircom to win. It's a difficult proposition with a 50 per cent share backing for the Valentia bid. In fact, it's close to a near impossibility for e-Island. Yet there are those unwilling to write off the charismatic O'Brien.

The irony is that all the wrangling may be misplaced if the company cannot start to move forward again.

Analysts agree there needs to be more investment in the fixed network to allow more advanced services. The actions of Deutsche Telecom in Germany provide a convenient comparison. It has shown what needs to be done with an aggressive rollout of ADSL, investing in a new network.

"Relying on the old network without investment is doomed to fail. There are limits to how long you can do that. Keep capital expenditure high, and put more fibre in the network," advised Forrster's Godell.

Even after the exhausting battle of bids and counter-bids we still don't know for sure who will walk away with Eircom. According to an Eircom spokesman, a deal can be finalised anytime between now and Christmas.

Whoever wins, they need to be thinking carefully about how they take the company forward. And you can bet that's a thought process occupying bosses and consultants at former state telcos across Europe.