The long-suffering shareholders in Eircom are digesting the weighty documents regarding the linked demerger of Eircell and its sale to the British Vodafone Group.
Over the past three months the share prices of Vodafone and Eircom have been volatile but have declined in line with the average decline in the telecom sector. During February the Vodafone share price traded between 225p and 245p sterling compared with its recent range of 200p to 220p. During 2001 the Eircom share price has traded between 232 cents and 264 cents.
The Eircom board is recommending the sale of Eircell to Vodafone, and Comsource, which holds 35 per cent of the company, is committed to the deal. It is likely the majority of institutional shareholders will support the transaction. The Eircom board has the option to walk away from the transaction, without incurring any penalty, if Vodafone trades below 220p sterling in the run-up to Eircom's emergency general meeting. It is most unlikely that the board will choose to exercise this option.
For retail investors in Eircom it does seem that, irrespective of how they vote, the deal will go through. The prospects for their investment will depend on the performance of a combination of Vodafone and Eircom's traditional fixed-line business. Vodafone is highly regarded by analysts and, despite the uncertainties and high costs associated with the development of mobile services, it is viewed as the core holding in its global stock market sector. The majority of specialist investment analysts rate the stock as a strong buy (see table).
Vodafone Group was formed as a demerger from Racal Electronics in September 1991. The company subsequently merged with Airtouch Communications of the US and, during 2000, Vodafone acquired a majority stake in Mannesman of Germany. The result of these large-scale mergers and acquisitions is that Vodafone now has a unique global footprint with respect to mobile phone assets that provides it with a commanding presence in the global industry.
Vodafone's revenues have been growing rapidly and amounted to just under £8 billion (#12.9 billion) in 2000. The company is highly rated by the stock market as evidenced by the fact that its market capitalisation is 15 times its revenues. In contrast, Eircom has a price to sales ratio of 2.6.
Despite falls in the share price of telecoms companies over the past year their price-earnings ratios are still high due to the fact that, in general, current earnings have fallen faster than share prices. Clearly, investors in telecom stocks are hoping that earnings will grow strongly once the world economy recovers from the current slowdown and once the new 3G services are rolled out.
Shareholders in Eircom will probably have better prospects for recouping their investment as Vodafone shareholders than they would have if Eircom remained independent. The proposed deal does seem to be the best one available from a long-term perspective.
