ANALYSIS: Does the former State telco's undulating ownership merit a bailout?
THE BOUNDLESS enthusiasm that greeted the flotation of Eircom in 1999 seems like an age away now. Normally rational people took bank loans to participate in the largest-ever public purchase of stock in the Republic. Over half a million small investors were convinced their investment could only go one way: up. The government of the day did its part and heavily promoted the flotation as a low-risk investment. When the shares went out out at €3.90 a share, a cool €6 billion was raised for the State.
Three years later, following a bitter battle for control between telecoms tycoon Denis O’Brien and publishing magnate Sir Anthony O’Reilly, most of those retail investors were nursing heavy losses of €1.30 a share.
Sir Anthony’s Valentia consortium, which was backed by Goldman Sachs, Warburg Pincus and Providence Equity, bought the company for €3 billion. In March 2004, they refloated the business making a tidy profit in the process.
During the merry-go-round, the disastrous decision was made to sell off the Eircell mobile subsidiary to Vodafone in 2001. Realising that a mobile arm is essential to offer the full gamut of telecoms services, it bought the Meteor network for €420 million in 2005. Ironically that has proven to be one of the most prescient moves made by the telco in recent years.
Following a failed takeover bid by Swisscom in 2005, Babcock and Brown Capital (BCM), an investment fund offshoot of Sydney investment bank Babcock Brown, took the company private in a €2.36 billion deal the following year, which again included Eircom’s Employee Share Ownership Trust (Esot).
The main beneficiary of the many changes of ownership at Eircom has been the Esot. It initially held 14.9 per cent of the firm but, following the 2004 flotation by the Valentia consortium, this increased to 21 per cent, having previously dispersed a €66 million payout to its members. Its partnership with BCM saw the stake increase to 35 per cent.
If successful, the bid for Eircom by a group of former Babcock Brown executives would see the former State telco come under its fifth owner in a little over 10 years. None of those owners have been telecoms firms with a commitment to invest in the firm and manage it for the long term.
As a result, the Eircom network, once a prized national asset, suffered from significant underinvestment. It is barely able to provide acceptable levels of broadband and is constantly hammered by ComReg for the level of faults experienced by customers. It was little surprise when Eircom executives recently told an Oireachtas committee that their next-generation investments were on hold. Swisscom offered a glimmer of hope – it has one of the most advanced fibre optic networks in Europe – but its major shareholder, the Swiss government, vetoed the purchase.
Ever since Telecom Éireann left State ownership, a change of ownership or a refinancing seems to have been in the offing. Peter Lynch, the financier who served as the telco’s chief financial officer from 2000-2006, admitted to this paper that everyone in the senior management team made “several million” on the back of those transactions.
When Eircom was first floated in 1999, it had a turnover of €1.8 billion, debts of €540 million and assets of €1.35 billion. The debt pile has since ballooned to over €4 billion thanks to the various leveraged buyouts. The revelation that the company could default on its debt is little surprise to industry watchers – the writing was on the wall when Babcock Brown went bankrupt last year.
Eircom is central to the success of the Government’s smart economy strategy for economic recovery. Compared to the cost of bailing out the banks – which could rise considerably when they make their Nama write-offs – buying back Eircom might actually look like good business.
