Xavier Niel, the French billionaire who co-owns the rights to the ballad My Way popularised by Frank Sinatra, is sticking to an all-too-familiar chorus with his investment in Eir.
The telecoms entrepreneur’s takeover of Eir in early 2018 was supposed to open a fresh chapter for the former State monopoly.
Only six years earlier, the company succumbed to examinership, overburdened with €4.1 billion of borrowings after a series of financial owners used it as a vehicle to load up with debt and extract cash – at the expense of much-needed investment in its network.
The rescue involved creditors writing off €1.8 billion of what they were owed and senior lenders taking control of the telecoms group.
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Olivier Rosenfeld, one of Mr Niel’s right-hand men at NJJ, the billionaire’s private holding company, told reporters when the deal was announced that it was “back to basics” at Eir and that the new investors aimed to improve Eir’s relationship with ComReg, the industry regulator, and the Government. Xavier Niel’s companies would, he said, in future make money “through dividends and not refinancing”.
Back to basics, as it turns out, has been a return of asset stripping, cost cutting and financial engineering, which has yielded more than €1.73 billion of dividends since the takeover, in a period when revenues have declined. Dividend payouts in public companies are normally a percentage of net income.
In the case of Eir, they’ve been a multiple of the group’s accumulated €270 million net profits over the period under Mr Niel’s control.
All told, Mr Niel’s companies have benefited to the tune of €858 million from Eir dividends – some €200 million more than what they paid for their combined stake.
Two New York hedge funds, Anchorage and Davidson Kempner, which owned 56 per cent of Eir before Mr Niel turned up, continue to hold more than 35 per cent of the company, after selling a chunk of their shares to the Frenchman. They have also had massive paydays under the new regime.
The payouts started in April 2019, exactly a year after the takeover was cemented. Eir used €400 million that month from a €1.15 billion debt refinancing to pay a dividend up to a holding company.
This was used to redeem €400 million of loan notes that had been issued to Anchorage and Davidson Kempner as part consideration for Eir shares they sold to Mr Niel’s companies.
The manoeuvre effectively moved the liability from a holding company to debt to be carried directly by Eir.
Eir followed up with a €80 million dividend that December to shareholders. This marked the first put-out to Mr Niel.
The sale of Eir’s mobile tower infrastructure company in July 2020 to US group Phoenix Tower International for €300 million was followed, within months, by a further €450 million dividend distribution.
Figures contained in the company’s financial report for the first nine months of this year, published this week, show that it doled out a further €800 million of dividends to Xavier Niel (who took Iliad private late last year) and the US hedge funds.
The windfall was underpinned by Eir’s sale of a 49.9 per cent stake in its wholesale broadband subsidiary, Fibre Networks Ireland (FNI), to French private equity firm InfraVia, and a subsequent €765 million debt raise by the FNI.
Net proceeds from the deal, including the debt sale, totalled €1.2 billion, a company spokeswoman said in response to questions from The Irish Times this week.
Eir also sold a majority stake in Tetra Ireland, a provider of secure communications to the Garda and emergency services, in a €76 million deal.
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The group, it has to be said, has also bought back €320 million of debt so far this year.
“This dividend comes in the context of a massive programme of infrastructural investment, which has seen Eir invest €1 billion to build Ireland’s largest fibre-to-the-home [circa 1 million premises by the end of 2022] and 5G mobile network, with a further €1 billion committed investment in those networks over the next four years,” the spokeswoman said.
The investment figures sound impressive. But capital expenditure at Eir was running at an average rate of more than €290 million in the five years after it emerged from examinership in 2012.
It has actually declined marginally under Mr Niel to a run rate of less than €280 million.
Eir, which pulled an initial public offering (IPO) in 2014 as investors refused to pay up for a company with flagging revenues, hasn’t suddenly become a growth story under the Frenchman.
Revenues last year came to €1.24 billion, down almost 5 per cent from the 12-month period to June 2017 – and continuing a trend of ongoing decline that started in 2008. (Eir last year aligned its financial period with the calendar year.)
However, Eir’s earnings before interest, tax, depreciation and amortisation (ebitda) jumped more than 27 per cent between 2017 and 2021, to €662 million – driven as the billionaire’s lieutenants took a red pen to Eir’s costs base. Operating expenses were hacked back by 26 per cent over the period, to €574 million.
The company slashed its sales and marketing and customer service bill by moving previously outsourced activities back inhouse – with no discernible improvement to its notoriously woeful client service.
This followed an axing of hundreds of long-serving and higher-paid employees shortly after Mr Niel took over.
Pay costs declined by 15 per cent between 2017 and 2021, even though its overall headcount expanded by 2.5 per cent to 3,361. (The workforce subsequently rose further, to 3,487, during the first nine months of this year.)
The group’s €2.56 billion of net debt in September equated to 4.4 times earnings before interest, tax, depreciation and amortisation (ebitda) over the previous 12 months – marginally higher than where the ratio stood at the end of 2017.
The company expects it to decline to four by the end of this year – even as Eir forecasts that its ebitda will decline by “a low single-digit” per cent.
Debt ratings agency Moody’s downgraded its outlook on Eir’s already junk-rated creditworthiness to “negative” in September – saying its debt burden remains well above what is normal for a company with a B1 status (which is 13 rungs below Moody’s top-notch Aaa rating and four levels below what is considered investment grade).
While the hope is that earnings will stabilise next year, rising inflation and the weakening wider economic backdrop doesn’t help. Hardly a time for large payouts.
