The big corporate news on the Irish market this week was Eircom's announcement that it had agreed terms to purchase Meteor for €420 million.

The price tag and the fact that Eircom had beaten off other interested parties did not come as a surprise.

The decision to fund the bid's cost entirely by way of a rights issue at a deeply discounted rights price did create some ripples of surprise. Given Eircom's high level of debt, the company had no option but to at least part-fund the acquisition through the sale of new equity.

Funding the Meteor acquisition entirely by way of equity will give Eircom much greater flexibility in developing the business going forward. On the downside, the issue of such a large number of new shares - at the minimum rights price of €1.10, the number of Eircom shares in issue would rise by 50 per cent - is that the share price may be depressed in the short term.

In Investor's view, the company has chosen the right route given that Eircom's debt levels are already very high. Furthermore, achieving full value from the acquisition will require ongoing investment in new products and infrastructure. Of the mobile re-entry alternatives facing Eircom, the acquisition of Meteor was the favoured but most expensive route.

The alternatives were either mobile re-entry through the purchase of airtime from either O2 or Vodafone, the so-called MVNO route, where Eircom effectively acts as a reseller of mobile airtime, or to purchase the last 3G licence and then building out the network over a number of years.

A key advantage of the Meteor option is that it provides Eircom with a 10 per cent-plus market share from day one. Over the past 18 months, Meteor has demonstrated its ability to rapidly grow its subscriber base from 181,000 at end-December 2003 to 410,000 at end-June 2005.

In each of the last two quarters, Meteor has added 33,000 new customers. All of these are prepaid customers where profit margins are lower than for the postpaid market. Eircom aims to double Meteor's market share to 20 per cent over the next 3-4 years.

Meteor has already achieved strong growth momentum in the prepaid market and there is clearly potential for Eircom to leverage off its own customer base to gain a significant foothold in the postpaid market.

The acquisition of Meteor also allows Eircom, once it gains control of the company, to explore fixed-to-mobile convergence opportunities. The UK's BT is leading the way in terms of fixed-to-mobile convergence in Europe. This is where the same handset acts as a mobile phone outside the home or office, but becomes a fixed-line phone within the home/office.

BT is planning a mass-market launch in September and an increased number of handsets are expected to be available next year. Following the Meteor acquisition, Eircom will be the only Irish operator with both fixed-line and mobile capabilities. As well as opening up a new avenue for growth, this product has the potential to slow down the drift away from landline usage.

Not surprisingly, the announcement of the larger than expected rights issue has led to a fall in the Eircom share price.

Further volatility is likely in the share price in coming months, given that the process will probably take until the end of the year to complete.

It will be late August before the prospectus is dispatched and the rights issue price decided (the minimum price is €1.10).

The rights issue should then close by early October, and the necessary shareholder and regulatory approvals will probably then take another one or two months to complete.

Eircom's board has committed to maintaining the current high dividend payout (adjusted for the new shares to be issued), which means that Eircom will continue to offer a dividend yield of approximately 6 per cent.

While there is little prospect of dividend growth for the next few years, the medium-term prospects have clearly improved with the Meteor acquisition.