KPN and Telia will have the option to sell up to 15 per cent of Telecom Eireann in three years time under the terms of the strategic alliance announced this week. However, the consortium, which has agreed to buy 20 per cent for £183 million, will first have to exercise an initial option to increase its stake in the company to 35 per cent, at a minimum cost of £200 million.
Allowing the consortium to sell part of its stake in Telecom Eireann gives it an added incentive to ensure that the company's performance continues to improve over the next three years. While the terms of the deal are not being fully revealed, KPN Telia is believed to have the option to sell the 15 per cent into the stock market, which would introduce private institutional shareholders to the company for the first time. It must retain the initial 20 per cent for a longer term.
Under the deal, the Government will receive a top up payment in three years, estimated at more than £100 million, if Telecom Eireann meets certain growth targets.
KPN Telia would have to pay extra for the initial 20 per cent stake. If the return it gets, through dividends and capital growth, exceeds an unspecified target, it must pay 60 per cent of the additional amount to the Exchequer.
A similar formula applies to the further 15 per cent, which it has an option to buy in three years time. It must pay at least £200 million to exercise the option. If the value of this slake is more than £200 million, 60 per cent of the excess reverts to the Exchequer.
One way the value of the company could be determined in three years lime is if KPN Telia decided to sell on some or all of the 15 per cent. Otherwise, an independent valuation would be undertaken.
The deal has received a cautious welcome from industry analysts. The US merchant bank Salomon Bothers said that the deal, which valued Telecom at £1.1 billion, was "fair". Although the consortium was paying slightly under the odds for the European telecommunications sector, the deal contained significant non monetary benefits for Telecom and the Government, according to Salomon.
In particular, the bank highlighted the match between the new partners' areas of technological expertise and Telecom's current needs, as well as their good industrial relations track records.
Mr Francis Woollen, an analyst with British merchant bank Warburg, said that the price paid was at a slight premium to what the company was currently worth.
Mr Alfie Kane, Telecom Eireann's chief executive, told The Irish Times yesterday that Telecom had found a "good partner, a good strategic fit". He said the support of the unions was important and would help to conslidate the deal.
Mr Kane said that the deal would allow Telecom to sharply reduce its debt, using the £220 million of the sale price that has been earmarked for this process and freeing cash for investment and expansion. In addition to investment in its existing network, Telecom could, in a couple of years time, have up to £100 million a year to invest in expansion in Ireland and overseas, he added.
