The Eircom board meets this evening, hoping it can decide how to respond to the bids being lodged for the company. The precise details of the offers it will assess are not yet clear. But how should the board approach its task?
There have been two firm bids - one from the Valentia consortium headed by Sir Anthony O'Reilly and the other from eIsland, led by Mr Denis O'Brien. Both are being asked to indicate, by this evening, the best final offer they can make. Two US investment groups - Kohlberg Kravis Roberts and Blackstone - are also considering whether to bid, while a consortium led by the financier Mr Dermot Desmond, could yet decide to enter the race. The board could decide to give a conditional recommendation to one of the offers this evening. This would mean it was advising shareholders to accept it, subject to no better offer being made within a short period of time. It may decide that it needs further clarification or information from some of the bidders. The board could decide that none of the bids properly values the company at the moment and that it will not recommend any of the offers.
This last point is important. The board should not be afraid to reject all of the offers on the table. It cannot, at this stage, be indecisive. But if it does not feel that any of the offers fairly reflects the value of the company - and there is an argument that telecoms shares are all trading at fairly modest levels at the moment - then it can decide to recommend none of them. This would create one problem; the shares would fall back sharply on the market, disappointing those hoping to cash in quickly at a reasonable price.
In the longer term, if the company remained independent, the share price would depend on Eircom's performance and on stockmarket trends. To support the case for doing this, the board and management would need to bring forward a convincing strategy for growth and development - something they have to date failed to do.
If the board decides to sell, then it will be seeking an offer which can win the support of all its shareholders - employees, financial institutions and members of the public. Such a bid would need to be the highest, or joint highest, in cash terms and to offer terms acceptable to the Employee Share Ownership Trust, which controls 14.9 per cent of the shares on behalf of company staff.
In striking the necessary balance, the board must realise that it has a particular obligation to look after the interests of small shareholders. Having bought in when the market for telecoms shares was strong, they may now be asked to sell when the market is quite weak. For this reason, the board should press all of the bidders to include some kind of mechanism - such as the warrant offered by eIsland - which would allow shareholders retain some stake in the future of the company. This would mean that if it was sold again or floated on the market, the exiting shareholders could get at least some of the benefit. The judgment being faced by the board is not an easy one and, before final details of all the offers are available, it is impossible to recommend what it should do. But the task for the board is clear. It must either recommend the best offer or set out a convincing strategy for enhancing the value of the company under its current ownership structure.