Desmond makes most of Esat licence win

Opinion: The point is sometimes made about Denis O'Brien that he was given the State's second mobile phone licence, sold it on for a personal profit of about €300 million, and by way of locating his tax residency in Portugal, didn't even pay tax on his windfall. Put that way it sounds as if he won something equivalent to a super-lottery when he was awarded the licence. The reality is somewhat more complicated.

The evidence heard by the Moriarty Tribunal makes it clear that Mr O'Brien went to huge efforts to win the licence, beating his better-heeled competitors because he tried harder and put more effort and money into the competition.

Similarly, the idea that having won the licence competition, the riches he eventually received were guaranteed, does not reflect the reality. Competitors to the monopoly incumbent were being introduced to markets throughout the EU in the mid-1990s. Esat Digifone managed to win more market share from the Irish incumbent (Eircell) than most if not all of its comparable operators around the EU. By the time Mr O'Brien sold his telecoms business to BT, its value - fixed-line and mobile - was based on the hard work and success of the previous years.

That one person should get such a huge amount of money for their labours may be considered by some to be morally wrong, but that is more a criticism of the type of world we live in than a criticism of Mr O'Brien. The person who might be said to have more truly won the lottery with Esat Digifone is Dermot Desmond. He made more than €127 million from the company and listening to the evidence heard by the tribunal to date, it is clear that he got an enormous return on what may in reality have been a small investment made with little risk. (Mr Desmond is an investor and there is no criticism intended by the observation.)

Also, as a financial as against an operational shareholder, he had much less responsibility than Mr O'Brien for growing and running the company.

Mr O'Brien's operational partner in the Esat Digifone bid was Norwegian State company Telenor, a huge company with a very healthy balance sheet. Mr O'Brien's company, Communicorp, had a weak balance sheet and Mr O'Brien feared that this would be considered a negative factor by those assessing the licence bids. The evidence is that this point was niggling at Mr O'Brien.

In late September Mr O'Brien did a deal with Mr Desmond whereby, in return for underwriting all of the share capital of Esat Digifone not owned by Telenor, Mr Desmond would be given the right to 25 per cent of the consortium. Another element to the deal was that, win or lose, Mr Desmond would foot 25 per cent of the bid costs. With total bid costs of around €1.9 million, this latter commitment meant Mr Desmond was risking just under €475,000.

Of course as a 25 per cent shareholder he was risking putting up 25 per cent of the capital injection - maybe £12 million - for a business project that could be a flop. The evidence of his associate, Michael Walsh, indicated that Mr Desmond did not even conduct an in-depth study of the Digifone business plan before committing himself. He decided that if a top -notch company like Telenor was backing Mr O'Brien, that was good enough for him. Also he had a positive view of the tech sector at the time. Accepting that his assessments were correct, the risk involved in backing Digifone was only the 25 per cent cut of the application costs.

Another input from Mr Desmond was the provision of underwriting to Mr O'Brien's end of the consortium, though it seems Mr Desmond was of the view that if the consortium won the licence, Mr O'Brien would be able to get the funding he needed.

A letter announcing the underwriting deal was sent into the assessors in the Department of Transport, Energy and Communications - and was sent straight back. The time for submissions had passed and no new material was being accepted. The letter would serve no role in the competition, but Mr Desmond still had his right to 25 per cent.

Before the licence was handed over, the Department insisted that Mr Desmond reduce his shareholding to 20 per cent. He sold his five per cent in equal portions to his two partners in the consortium, collecting £2.8 million. In April 1997 Mr Desmond sold a further 10 per cent to his two partners, again with equal amounts going to Telenor and Mr O'Brien's company.

He subsequently reduced his shareholding by another 9 per cent, keeping one per cent. This one per cent acted as a deal-maker when BT came to buy Esat Digifone at a time when Telenor also wanted to buy it, and so was sold for a top dollar price.

The early share transactions were the result of pressures to sell that had nothing to do with his finances or the price offered, but they nevertheless balanced the capital injections he had to make in Digifone, while at the same time reducing the size of those capital injections.

The final confidential report of the assessors who awarded the licence to Esat Digifone has been examined by the tribunal. We now know that they considered Mr O'Brien's financial weakness at the time and decided it was an issue that would be resolved once he was given the licence.

They saw no need for underwriting, the issue that brought Mr Desmond into the consortium in the first place. Mr Desmond made more than €127 million in less than five years having, arguable, only exposed himself to a real risk of €475,000 if the bid for the licence had failed.

You can only make that sort of money when you already have lots of money.

What a lousy world!