Spectrum Equity Investors, the US investment fund behind Mr Denis O'Brien's #2.99 billion (£2.35 million) bid for Eircom, says it plans to sell part of its holding to unnamed European investors. If eIsland - Mr O'Brien's bid vehicle - is successful, then Spectrum will end up owning most of the former Telecom Eireann, with Mr O'Brien and his associates holding a significant minority stake.
Mr Bill Collatos, the principal of Spectrum, said yesterday he would reduce his stake to 3050 per cent. A significant chunk of the equity - 29.9 per cent - will be offered to the Employee Share Ownership Trust (ESOT), while the rest will be sold to European rather than US investors, he said.
The desire to get European investors on board makes it unlikely that Spectrum will invite in Kolhberg Kravis & Roberts or Blackstone, the two other US buy-out houses that had been looking at Eircom, he said.
Mr Collatos said he had no plans to talk to Mr Dermot Desmond, who also examined bidding for Eircom via IIU, his IFSC-based investment company. "But he is not persona non grata either," he said.
Mr Collatos confirmed he had been advised against backing Mr O'Brien, who is being investigated by the Moriarty Tribunal over alleged payments to Mr Michael Lowry, by unnamed members of Valentia Telecom, the rival consortium headed by Sir Anthony O'Reilly.
"Nothing surprises me anymore. It is a hotly-contested opportunity. By supporting Denis we are creating the market. It is not lost on us that if they could get us to suspend our support they would have won," he said yesterday.
Valentia, which has bid #2.79 billion, was the favourite to win Eircom until late last week when the board switched its backing to eIsland after it increased its bid to #2.99 billion.
Mr Collatos said eIsland was prepared to pay up for Eircom because of the strength of the economy, the strength of the eIsland management team and eIsland's attractive capital structure. "Denis O'Brien's comprehensive knowledge afforded us a better insight and as a result we are prepared to pay a higher price. It will mean a lower return on exit but we are willing to live with that," he said.
Eircom is attractive to Spectrum, and to the US investment funds that control Valentia, because it is the dominant telecom provider in a strongly growing economy. "Home growth means line growth and there are the opportunities to sell additional services and win back business from Esat," he said.
Mr Collatos said the difference between eIsland's last offer of #1.305 per share and the most recent offer of #1.36 has been made up by additional equity and not new debt.
Both the eIsland and Valentia bids are highly leveraged with up to #2 billion of the purchase price being in the form of debt. "We have not changed the leverage or the debt services provisions," he said. As a result, the company's ability to invest has not been additionally hampered, added Mr Collatos.
The ESOT - which has a pivotal 14.9 per cent stake in Eircom - has been slow to agree to meet eIsland to discuss the latest offer. Mr Collatos played down speculation that a poor relationship between the unions that control the ESOT and Mr O'Brien - which date from his time at Esat Telecom - make a deal unlikely. Mr O'Brien refused to recognise the Communication Workers Union at Esat which he controlled until last year.
Mr Collatos believes the ESOT would support the bid as it gave them a 29.9 per cent stake for #180 million, while the same stake would cost #361 million under the Valentia structure.
The bid - which will be formally presented before the end of the month - can succeed without the support of the ESOT, he said. "It has the backing of the board and has passed the hurdle required to allow Comsource - a key 35 per cent shareholder - get out of its commitment to sell to Valentia."
Mr Collatos added that it was nine cents higher than the Valentia offer, making it much more attractive. "Because of what has happened, Valentia may be unable to complete the transaction," he said. Boston-based Spectrum has invested more than $3 billion (#3.5 billion) in telecoms ventures in North America and Europe.
J.P. Morgan Chase, the second largest US bank and an adviser to eIsland, announced a 61 per cent slump in profits yesterday to $690 million, well below estimates, due to investment losses in a weak stock market.
