Meteor's €420m sale price may be money well spent

Analysis: There were two elements of consensus in most analysis of Eircom's €420 million agreement to buy Meteor yesterday.

First, it was accepted that Eircom needed to do the deal so that it could tap into the fastest-growing and most lucrative part of the telecoms market. Second, many observers noted that the price tag was rather large.

Eircom's chairman, Sir Anthony O'Reilly, yesterday accepted the first point but rejected the second, particularly when it was suggested that Eircom could have paid less for Meteor by buying it earlier.

He said that while Eircom has wanted and needed to get back into mobile for some time, it had been unable to break a non-compete agreement with Vodafone which dated back to the sale of Eircell in 2001.

Rather than focusing on the price being paid, he instead outlined the ambitious plans Eircom has to turn loss-making Meteor around and double its market share.

Eircom is betting on Meteor adding to group earnings three years after the acquisition is completed.

Key to achieving this will be the firm's ability to win customers from the two dominant mobile operators, Vodafone and O2. Eircom chief executive, Dr Philip Nolan, yesterday explained how the company intended to go after this goal by tapping into its existing base of 1.4 million customers.

Crucially, prices will also be lowered by as much as 20 per cent, as Meteor spends about €50 million per year on strengthening its physical network.

"We will keep it low-cost and we will make it ubiquitous," said Sir Anthony O'Reilly yesterday.

Analysts at Davy noted last night that Eircom's target of winning a 20 per cent share of a €2 billion market would imply very significant lost profits for other players.

"This will undoubtedly be resisted aggressively," the analysts observed.

For investors, the most important short-term issue in the acquisition will be the one-for-two €420 million rights issue that will cover all of the purchase price.

The issue, which is being underwritten by Goodbody and Morgan Stanley, will be priced at a good discount.

The price will be finalised at the end of August, but the minimum level has been set at €1.10. On last Friday's closing price for Eircom, this would imply an ex-rights value (the price of shares which do not qualify for the rights issue) of €1.57.

The firm has said it will maintain its generous dividend yield of 6.1 per cent, but the actual dividend will be adjusted to reflect the "bonus element" of the rights issue.

Thus, last year's 11 cent dividend would be cut to 9.5 cent under last Friday's closing price.

This policy will have required Eircom to win the co-operation of its main shareholders.

Evidence of this came yesterday with the Eircom Employee Share Ownership trust stating that it would participate in the rights issue in respect of its 20.9 per cent stake.

Sir Anthony O'Reilly, who said he would buy a batch of shares yesterday, is also planning to take part.

He was re-elected yesterday as chairman for a new three-year term, but he declined to confirm how much of that he would serve.

"We'll see," he said, adding that he said he would remain in the role for the "foreseeable future".

Included in yesterday's deal announcement was an Eircom trading update for the first quarter, which analysts said was in line with their expectations.

The company said that it would report revenues of €399 million, compared to €402 million last year.