Eircom trust no stranger to hard business talking

Analysis: The Employee Share Ownership Trust (Esot) at Eircom is no stranger to hard negotiations with the big boys, with the latest deal with Babcock & Brown only proving the point.

With a takeover now looking more likely than it has done at any point over the past year, the Esot is facing into a new and complicated structure for its shareholding.

It is thought that under the terms of a deal agreed with Babcock & Brown, the Esot will put both its ordinary shares and its preference shares in Eircom on the table. The trust received both batches of shares when Eircom floated for a second time in 2004.

In return for making them available now, the Esot becomes a joint bidder for the company.

Put simply, the preference shares, worth between €140 and €180 million, will go into the bidding vehicle. In place of these, the Esot will receive ordinary shares in the vehicle that will, all going well, formally offer €2.20 in cash for each share for Eircom. In this way, the Esot's stake in Eircom would remain steady at 21.5 per cent if the takeover is successful.

The second part of the deal is the really attractive bit. This would see the Esot exchanging its €507 million worth of ordinary shares in Eircom (its current 21.5 per cent stake) for preference shares that are guaranteed by Babcock & Brown's banks.

The Australian fund has not made its banking arrangements public but it is thought to have secured finance from backers including JP Morgan, Barclays and Credit Suisse.

For the Esot, the bank guarantee accompanying the preference shares would mean it would carry no risk. Crucially, the structure would also allow the trust, comprised of former and current Eircom staff, to minimise its tax bill in relation to the takeover.

This is because rather than selling its 21.5 per cent stake for cash in one go, it will be able to defer payment and draw it down over a period. Cash distributions can thus be made to the 12,000 or so members of the Esot at intervals. In this way, the payouts that started after Eircom originally floated in 1999 can continue.

Lucky workers, you might think. Well, not if you're the Communications Workers Union (CWU) that represents 6,000 of Eircom's 8,000 current employees. Despite being represented on the Esot by a full-time union official, the CWU is "angered" by what it sees as Babcock & Brown's failure to engage with unions on the takeover.

The CWU warns it will have to deem the purchase "hostile" unless contact is made soon. On the face of it, this leaves open the unlikely prospect of the union in open conflict with the Esot, which contains about 3,000 of its members. When Eircom was originally floated, the CWU would have represented a much larger proportion of the trust.

In reality, an accommodation is likely, with Babcock & Brown thought to view the whole lack of meeting debacle as a simple misunderstanding of holiday schedules. The CWU's telephone is likely to ring next week.

The institutions that own the 49.7 per cent of Eircom not owned by the Esot and Babcock & Brown are meanwhile likely to rush to sell up for cash.

The €2.20 to be offered would give shareholders a 48 per cent return on the €1.55 they paid at the 2004 flotation. This return takes account of the €423 million rights issue Eircom completed to pay for Meteor last year, as well as dividends already paid.

A further 5.2 cent dividend which had been expected by shareholders would also be paid under the proposed offer.