The Eircom board will make the final decision on the share price at which senior executives will be able to buy shares under a share option plan which will be presented to shareholders in coming weeks. With Eircom shares touching new lows in recent days, the issue is whether the board is prepared to set a price higher than the current market price, which analysts say is being held down by technical factors and a depressed market for telecoms shares. This price and the performance criteria for awarding shares to executives are the issues delaying finalisation of a plan for presentation to shareholders. Negotiations are reaching the final stage between Eircom and the Irish Association of Investment Managers on a plan that can be approved by IAIM.
Eircom shares closed 5 cents stronger yesterday at €2.60. But the shares are well off both their flotation price of €3.90 and subsequent high of €5.00. Shareholders will be asked to approve a share option plan at the Eircom annual general meeting on September 13th - Eircom is required to send them details of the proposed plan three weeks before the meeting.
If the option price is set at current share price levels, Eircom executives stand to make significant gains when the share price increases. "Pegging the option price at around €2.60 when market prices for telecoms are generally fairly depressed could give the executives who have been in place through the fall from the flotation price of €3.90 a very big bonus," one stockbroker commented.
But there is nothing in the IAIM rules to prevent the shares being awarded at prices above current price levels. Under the rules there is a formula for setting the price at which the share options can be issued - it "should not be less than the average price of the shares in question on the dealing day preceding the time when the participation is granted".
This formula sets a minimum required price - at current price levels €2.60 could be struck. But there is nothing to stop the Eircom board setting a higher share price. The board is being advised by the remuneration committee - chairman Mr Ray McSharry, Mr Dick Spring, Mr Marten Pieters and Mr Jim Flavin. The issue for the board is finding a price acceptable to shareholders, also ensuring that incentives remain for senior management. On the performance criteria the IAIM wants the awarding of shares tied to increases in earning per share (eps). But Eircom is understood to have argued that this is unsuitable for a company where eps growth is held back by heavy capital investment. A formula that would strip out the impact of capital investment while ensuring demanding earnings growth performance could suit both parties. Negotiations on this are at an advanced stage.
Eircom shareholders will have to approve any scheme put to them by the board at the annual general meeting on September 13th. Ordinary retail shareholders own about 22 per cent of the company. Crucial to the outcome will be the vote of the worker shareholders who own 14.9 per cent of the group through the Employee Share Ownership Trust (ESOT), the selling Dutch shareholder KPN with 21 per cent and Swedish shareholder Telia which has a 14 per cent stake. Institutional shareholders who own just over 28 per cent are likely to vote in favour of any which has the approval of the IAIM.
