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November 9, 2005

Swisscom confirms Eircom talks

Swiss telecoms carrier Swisscom has confirmed market rumors and admitted it is in talks with Eircom Group, the Irish carrier. Although it warned that a takeover deal was not certain, any deal would give Swisscom much needed access to a foreign market, albeit perhaps not Europe's most alluring.

By CBR Staff Writer

Swisscom confirms that it has entered into discussions with Eircom in relation to a possible transaction, said the carrier. However, there can be no certainty that an offer will in fact be made. A further announcement will be made when appropriate.

Earlier this month, Eircom revealed it had been approached by an unnamed suitor. Swisscom was identified as being one of the possible bidders, and analysts estimated any takeover bid would be in the region of E3 billion.

Swisscom is a cash-rich operation. It is Switzerland’s largest telecoms operator and has more than 15,000 staff. It has both fixed-line and mobile assets, with more than four million mobile phone subscribers. Unlike many of its European competitors that embarked on expensive expansion policies during the late 1990s, it opted instead for a conservative route and concentrated on its core Swiss market. This meant it rode the downturn better than most and emerged with very little debt. But this policy did have its downside in that Swisscom now has limited expansion opportunities in Europe.

Last year it looked like it was finally going to be able to bag a long-mooted acquisition of neighboring national carrier Telekom Austria for E7.7 billion. However, that deal was scrapped due to political pressure from the Austrian government as well as trade unions. It also failed in its attempt to acquire the Czech carrier Cesky Telecom in April.

Swisscom did expand from its domestic market in July when it took a majority stake in Hungarian broadcaster Antenna Hungaria. It also announced plans to buy financial services specialist Comit in September.

Yet Swisscom remains in a tricky strategic position. At home, it is facing a hugely competitive market, and earlier this year it cut the fees it charges for calls from its landline network to other landline and mobile networks. Competition from smaller operators such as Cablecom, the biggest Swiss cable operator which launched a phone service last year, is especially hurting the carrier.

If it were to acquire Eircom, which controls about 80% of Ireland’s fixed-line phone market, it would give the Swisscom some much-needed access to a foreign market. However, it is fair to say that the Irish market is not one of the largest in Europe, with a population of just over four million people. Eircom has roughly 600,000 subscribers for its internet service, while its recently acquired mobile arm (Meteor Mobile Communications) is only Ireland’s third largest mobile operator.

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Like other western European markets, the Irish mobile market is well saturated, with mobile phone penetration rates at about 96%. It is dominated by the two leading operators, Vodafone and O2, which between them control 90% of the Irish mobile market.

Meteor, meanwhile, has a market share of about 9% to 10%, but Eircom wants to double this to 20%. It will have a tough fight on its hands, especially as Meteor is mainly targeted at the youth market, which is made up of mostly pre-paid customers rather than the more desirable contract customers. Meteor reported relatively modest annual revenues of E93.9 million for 2004, but is still growing its subscriber base to approximately 410,000, up from 181,000 at the end of 2003.

Like BT, Eircom fell prey to the prevailing financial wisdom of the time that fixed-line operators should spin out their mobile operations in order to concentrate on core business and allow for flexible growth opportunities for the mobile unit with no shackles to legacy communications. It sold its Eircell operation to mobile giant Vodafone for E4.3 billion in 2001. Disastrous spin-offs such as these have meant that fixed-line operators such as Eircom and BT have struggled to adapt to falling traditional call revenues, and have had to rely increasingly on broadband offerings

Even worse for the Irish carrier, the sale of its mobile arm in 2001 triggered a VC takeover battle. Eircom was taken private in a E3 billion deal by the Valentia consortium, whose stakeholders included Irish magnate Sir Anthony O’Reilly, financier George Soros, and Providence Equity Partners. But then in March 2004, the carrier returned to the stock market.

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