If you are one of the 480,000 small shareholders in Eircom then you will soon have a decision to make. The news last week that Eircom and it unions have finally come to agreement on the sale of Vodafone means that deal is now pretty much in the bag. The spotlight now falls on the approach made by Mr Denis O'Brien and eIsland for the rest of Eircom, namely the fixed-line telephony service.
Although Mr O'Brien still has some way to go, the expectation is that he will bid something in excess of €1.10 for the Eircom rump. Unlike the Vodafone sale - which is the sale of a subsidiary and requires only the support of a simple majority of shareholders - Mr O'Brien's will need the support of small shareholders.
Under Irish Take Over Panel rules shareholders cannot be forced to sell their shares unless the bidder owns more than 80 per cent of the company. Staff own 15 per cent of Eircom through the Employee Share Ownership Trust and the very small shareholders - with 1 to 10,000 shares each - have 14 per cent.
This figure does not include the 5.2 per cent of shareholders who own shares through the Eircom nominee account, almost all of whom are small shareholders. When this is taken into account staff and small shareholders own 35 per cent of Eircom and can block the sale to eIsland.
Comsource and other big investors who own the other 65 per cent of the company want to sell out for strategic reasons. They have better things to do with their money and have probably written off their losses already, but the reality for small investors is quite different. Sell your shares now and you crystallise your loss and give up any chance of recouping it through an improvement in the Eircom share price. The key question for small investors is whether the share price will recover and the interest being shown by Denis O'Brien and a number of others possible bidders is perhaps the best indicator that it will.
It is worth remembering that Mr O'Brien will be borrowing something in the region of €1 billion to do this deal. He must believe he can generate sufficient cash from the company not only to pay interest on this debt, but also fund the company's development. He must also believe Eircom will ultimately increase in value sufficiently for him to sell it, pay off his debts and trouser a significant profit.
The only reason for small shareholders to let eIsland buy Eircom on the cheap with a view to selling it high is if they think Mr O'Brien can do something with Eircom that the current management cannot. Otherwise they might as well sit tight and let Eircom management unlock the value that eIsland believes is in the business. It is hard to see quite what Mr O'Brien can do that Eircom management can not or will not. It could be argued that in reality Mr O'Brien can do less, as Eircom under eIsland will be much more heavily in debt than at present.
If, as it appears, Mr O'Brien would not be in a position to invest more money in Eircom than the current management, then the next question is: what else can he do? Run the company better than Mr Alfie Kane is the pat response and one that does not appear unreasonable.
He is, after all, a gifted entrepreneur, but what Mr O'Brien is not is a successful manager of a large fixed-line telephone business facing unprecedented competition. His biggest business coup was to sell Esat Telecom to British Telecom for £2 billion in December last year. What BT were really paying for was Esat's 49.5 per cent stake in the second largest mobile business, which was not even managed by Mr O'Brien or his eIsland team.
In fact, when he sold it, the fixed-line business of Esat Telecom had been in existence for 10 years but had only 12,750 business subscribers. It had yet to make any significant inroads into the residential market. One could go further and suggest that the main reason Esat's fixed-line business was not doing so well was that - for all its other faults - Eircom had risen to the challenge it presented. Mr O'Brien has privately admitted Eircom's fixed-line operation is a well-run business.
Perhaps, the biggest hole in Mr O'Brien's credentials is his lack of experience in dealing with organised labour. Last week the Eircom unions showed their mettle when they won hands down on the issue of a new £22 million ESOP for workers leaving the company to join Vodafone.
Even Mr Peter Lynch - Eircom's new financial controller who hails from the same young, gung-ho, entrepreneurial stable as Mr O'Brien - had to swallow this bitter pill. On the basis of the above it seems pretty unlikely that if Mr O'Brien got his hands on Eircom he could run it much more successfully that the current management. He probably would not even try and is more likely to apply the "if it ain't broke don't fix it" maxim.
What Mr O`Brien knows - and small shareholders may have lost sight of - is that markets are cyclical and an upturn in telecom shares is a racing certainty in the three-to-five-year time frame in which eIsland is operating.
When the rally comes Mr O'Brien plans to own the largest player in the Irish market. If he sells it, he will clean up and all the 480,000 former small shareholders in Eircom will be able to do about it is ring Eamon Dunphy.