Business Opinion: Eircom is now expected to emerge as the winner of the auction for Meteor, with an announcement possibly coming as early as this morning ahead of the company's annual general meeting. Much of the reaction will centre on the price paid by Eircom which is expected to be €420 million.
Shareholders will be justified in asking the chief executive, Philip Nolan, if he has not contracted a bout of bid fever and paid over the odds for the number three player in market. In coming to this view they will point out that the other two bidders, Denis O'Brien and Smart Telecom, both dropped out claiming the price was to rich for their blood.
Anyone wondering why Nolan is prepared to pay €420 million for Meteor could do worse than start by looking at Vodafone's preliminary results for 2004 published last May.
The world's biggest mobile operator has become somewhat coy about publishing the details of its Irish operation and no longer breaks out turnover and earnings for this market. However, the following two sentences from the results announcement pretty much say it all: "Service revenue in Ireland increased by 10 per cent, in local currency, primarily as a result of additional voice usage. Intense competition restricted growth in local currency service revenue in the Netherlands to 1 per cent and contributed to a 4 per cent decline in Sweden."
It is clear that Ireland remains one of the most profitable mobile markets in Europe, and there is no reason to believe things will change in the foreseeable future. At a fundamental level anyone with the opportunity to get into this market for what they consider a reasonable price should grab it and their shareholders would be foolish not to back them.
The question really is whether buying Meteor represents the correct way in for Eircom. The general consensus is that €420 million is a very full price, working out at around €1,200 for each of its 340,000 customers. This looks like something of a bargain compared to the €2,759 per customer paid by Vodafone in 2001, but is at the top end of the prices being paid in European deals at present.
Eircom can justify paying over the odds for a couple of reasons. The first is that they believe that they can make more of Meteor than the other bidders because they already have a huge customer base thanks to their fixed line business.
But it is also the case that Eircom need Meteor more than the other two bidders. As Denis O'Brien has shown, Meteor is just one of a number of investment options open to him and in the end he plumped to invest further in the fast growing Caribbean market rather than pay up to get into the maturing Irish market. Equally Smart Telecom has plenty to do building its broadband business.
Eircom, on the other hand, has identified re-entering the mobile market as one of its key strategic objectives along with rolling out broadband. Both are seen as drivers of growth in the business and Eircom is under a certain amount of pressure to deliver on both objectives so that it can trim back the generous dividend policy that supported its return to the market last year.
Paying a full price for Meteor is one solution to this problem. The other was to enter the market via the virtual network (MVNO) route, buying time from one of the other operators.
When he goes to his shareholders in the next few weeks looking for €420 million via a rights issue, Nolan will need a good explanation for not going down the MVNO route which require far less investment. Once again, Vodafone will provide him with his answers.
Along with O2 it has refused to enter into any sort of meaningful negotiations with Eircom and they are now involved in a protracted legal battle with the communications regulator who is trying to force them to open their network.
Comreg may succeed, but building a MVNO network based on a deal negotiated with an operator who has been forced to the table by the regulator has obvious risks. In addition going down the MVNO route means you have no control over the development of the network, something that would be important to Eircom should it try and capitalise on the potential for fixed to mobile convergence.
Nolan can make a convincing case for paying up to buy Meteor, but in doing so he leaves himself open to another question. Why didn't he buy it a year ago when it could have been picked up for half the price?
The first questions whether or not the company was genuinely up for sale. But even assuming it was the focus of the company was elsewhere until last summer when its venture capital backers, the Valentia consortium, exited. There was also the matter of its non-compete clause with Vodafone, although a way could probably have been found around this.
Ultimately the argument that Eircom can and presumably will make is that time will show whether they have over paid for Meteor or not.
Nolan can - with some justification - point out that the consensus was that Valentia overpaid for Eircom when it took it private in 2002.
In fact, they went on to make a killing.
