Eircom employees could get a #15,000 (£11,813) tax-free payout if the trust that owns 15 per cent of the former Telecom Eireann accepts on their behalf the takeover offer formally presented by eIsland on Monday night. The posting of the 137page document to shareholders, including the Employee Share Ownership Trust, signals the start of the formal takeover battle for Eircom after more than five months of talks. Valentia Telecommunications, the other bidder, has 14 days to match eIsland's #1.36 per share offer or run the risk of losing the support of Comsource, the single largest shareholder, for its proposed #1.27 offer.
The ESOT trustees remain committed to backing Valentia and the trust is balloting its 13,000 members on the offer. This closes at midday today and the result should clear by tomorrow evening. ESOT is also considering eIsland's offer which will be but to a separate ballot, according to the document.
In a letter to shareholders recommending the offer Eircom chairman Mr Ray MacSharry says "the independent directors are aware of the ESOT's previously expressed preference for the Valentia offer. However, the independent directors are aware of the belief of eIsland that the offer will be attractive to the trustees of the ESOT and the ESOT beneficiaries".
Mr MacSharry says eIsland is offering a higher price for Eircom shares but is willing to let the ESOT increase its shareholding in Eircom to 29.9 per cent, the same level as Valentia.
The cost to the ESOT under the eIsland proposal will be #180 million compared to #360 million under the Valentia bid, according to eIsland. The consortium calculates that under its offer the surplus of what the ESOT received for its 15 per cent compared to what it had to reinvest to take 29.9 per cent in the leveraged buyout comes to #20,500 per member. The same calculation for the Valentia deal produces a surplus of #4,600.
They also claim that #15,000 could be paid tax free in less than 12 months in the form of loan notes.
The document being posted to shareholders does not detail the equity split and only lists shareholders who will own 1 per cent or more of the company if the offer succeeds. As well as Mr Denis O'Brien and Spectrum Equity Investors, the US venture capital company backing eIsland, they will include Mr Paul Connolly and Mr Leslie Buckley - Mr O'Brien's advisers and business partners.
If the offer for Eircom succeeds then Spectrum will become the largest shareholder but will reduce its shareholding to less than 50 per cent, including the sale of 29.9 per cent to the ESOT and up to 20 per cent to new European investors. Mr O'Brien and his management team are likely to hold up to 20 per cent of the equity.
Mr O'Brien already owns almost 5.5 million shares in Eircom according to the document. The salaries paid to Eircom's two most senior executives are also disclosed. Chief executive Mr Alfie Kane is paid #482,500 a year while finance director Mr Peter Lynch is paid #317,434. The document also confirms that Eircom has agreed to top up Mr Kane's pension fund by £984,000. Mr Kane is entitled to one year's salary if he leaves after the takeover while Mr Lynch will get the balance of his salary for the current year.
Both executive directors have given an irrevocable undertaking to sell their shares to eIsland as has Bank of Ireland Asset Management, the investment arm of Bank of Ireland. Mr O'Brien is on the board of Bank of Ireland and Investment Bank of Ireland, another bank subsidiary advising eIsland.
