Eircom and Comsource back new Valentia bid

The board of Eircom has agreed to withdraw its support for a €1.36 per share offer from eIsland and instead recommend a €1.365 offer from Valentia made in the early hours of yesterday morning. Providence Equity Partners, the US leveraged buyout fund led by Mr John Hahn, will become the largest shareholder in the former Telecom Eireann with a stake of 40 per cent.

The bid values Eircom at just over €3 billion and, although only slightly higher than eIsland's offer, it has the backing of shareholders controlling 52.59 per cent of the company. Comsource, the largest shareholder with 35 per cent, has agreed to support Valentia and to accept a rival offer only if it exceeds €1.50 per share.

Mr Ray MacSharry, the chairman of Eircom, said the board had been persuaded to change its recommendation because of the level of support that Valentia had secured and the fact that it was prepared to top eIsland's offer.

The high threshold agreed between Valentia and Comsource makes a fresh counterbid by eIsland, the rival consortium led by the businessman Mr Denis O'Brien, unlikely.

The €3 billion valuation put on Eircom by both bids is at the top end of what analysts calculate a buyer could pay and still turn a profit on their investment. Warburg Pincus, another US buyout fund that was involved with the original Valentia bid, has withdrawn from the consortium on the basis that the deal is not attractive to it at such levels.

Providence will put in the equity that was to be provided by Warburg Pincus and will end up controlling around 40 per cent of the company and have the largest number of board seats. Soros Private Equity Partners will take in the region of another 20 per cent. Sir Anthony O'Reilly, the non-executive chairman of the consortium, will hold in the region of 5 per cent and the Employee Share Ownerhsip Trust will have 29.9 per cent.

The ESOT was to be the largest shareholder under the original Valentia bid of €1.27 per share. The trust currently owns 14.9 per cent of the company and is joining the Valentia consortium. But it will first have to ballot its members for their approval and also obtain clearance in principle from the Revenue Commissioners in order to preserve its favourable tax status.

The ESOT met similar preconditions in order to participate in Valentia's early bid and sources close to the consortium said they did not anticipate any difficulties.

The ESOT is expected to ballot its members before the end of the month and the consortium has been given until September 7th to send out a formal offer document. Shareholders will then have 21 days to accept but the deadline may be extended for another 21 days.

The whole process must be concluded by November 27th or else Comsource is free to sell to other parties.

Sir Anthony O'Reilly said yesterday that it was important that the process moved to a speedy conclusion.

"Eircom is Ireland's flagship telecommunications asset. It is important for Eircom, its employees and customers that the uncertainty which has hung over the company in recent months is now brought to an end."

A spokesman for eIsland pointed out that Comsource's commitment to Valentia was conditional on the ESOT members voting in favour of the new offer.

The members of the trust will also have the opportunity to vote on eIsland's proposal which, he said, offered them the same stake in the company but for a much smaller investment. "It isn't over," he said.