Eircom launched a €1 billion bond issue yesterday in a move that will enable it to restructure its debt and pay out €512 million to Valentia shareholders.
The telecoms firm, which was bought by the Valentia Consortium in November 2001, will also raise new bank funding worth €1.4 billion in the transaction.
Eircom said the €2.4 billion refinancing would enable it to take advantage of historically low interest rates and would not affect its capital spending plans.
But the refinancing plan could prove controversial because of a massive €512 million payout to its venture capital owners, the Valentia Consortium. In a major capital redistribution following the refinancing, Eircom will pay a €446 million dividend to Valentia. It will also redeem €66 million in preferential shares held by the Valentia consortium.
The Valentia Group will redistribute the €446 million dividend to shareholders, which include a group of US private equity funds and the Employee Share Ownership Trust (ESOT). Sir Anthony O'Reilly, the current Eircom chairman, should net €20 million from his 5 per cent shareholding.
It is believed the ESOT will net up to €230 million from the payout because of the preference shares that it holds in the firm.
The payments, which will be financed by the bond issue, amount to almost half the €1 billion cash that the consortium paid up front to buy Eircom. It will also increase Eircom's aggregate debt to €2.4 billion, up from a current net debt of €1.79 billion.
Eircom's 10-year fixed-rate bond issue is being managed by Deutsche Bank and will be priced in the week beginning July 28th. It should be completed in August.
Eircom will benefit from lower interest rates of about 5 per cent from its bank debt restructuring, about 2.5 per cent below its current rate. The bonds issue, which will cost about €47 million in transaction fees, should provide more stable long-term financing over a 10-year period.
Eircom also released results for the year to the end of March 2003, which showed a strong operating performance for the group despite flat revenues.
Revenues increased 2 per cent to €1.68 billion year-on-year, up from €1.65 billion in 2002. Eircom generated an operating profit of €180 million in the year to the end of March, up from an operating loss of €51 million in the previous year.
This strong operating performance was bolstered by a sharp drop in restructuring costs and better cost control since Valentia took charge, the company said.
Eircom's cost of sales fell to €499 million in the year to the end of March 2003, down from €508 million in the previous year, the bond offer document published yesterday by the company shows.
This document also highlights a massive slump in the value of capital investment undertaken by Eircom recently.
Capital expenditure in Eircom's fixed-line infrastructure fell to just €197 million in the year to the end of March, down from €504 million in the year to March 2001.
Mr David McRedmond, Eircom's director of strategy, said the 2001 capital expenditure figure was not representative because of Eircom's international investments at the time.
He also said the refinancing would not affect the company's plan to invest €200 million every year in its operations. Eircom would also continue to seek cost reductions by reducing the number of staff by a further 1,000 by the end of 2004. Eircom currently employs 8,400 people.
The offer document also states that Eircom's goal is to reduce its workforce to 7,000 by 2006. It also discloses that Eircom is engaged in discussions with a third party about the prospect of outsourcing its IT infrastructure.
Meanwhile, Eircom's pension fund moved from a surplus of €359 million at April 1st, 2002 to a deficit of €325 million at March 31st, 2003. An actuarial loss of €704 million is recorded in the financial accounts under the new FRS 17 regulations.
Total directors' remuneration for the year to the end of March at Eircom 2003 was €2.1 million.
