Cantillon

Inside the world of business

Eircom’s strange bedfellows

THE TAX-free ATM that Eircom has become for its staff since privatisation makes for some strange bedfellows.

The employee share-ownership trust (Esot) at the former State telecoms firm has been contacted by Denis O’Brien’s Digicel in advance of next Friday’s deadline for proposals to take over heavily indebted Eircom.

While there is a possibility the two sides might collaborate on a bid, Digicel may proceed with its own proposal and seek Esot support later.

This is a far cry from a decade ago, when the Esot was the kingmaker in the takeover of the telecoms firm and chose to back Sir Anthony O’Reilly’s Valentia consortium rather than O’Brien’s eIsland bid. That was despite the fact that O’Brien’s bid may have been more financially beneficial for staff.

More than 4,000 Eircom workers signed a petition accusing eIsland of being “anti-union”, which they presented to management.

The proposal on which the Esot is working with majority shareholder STT would give the employee group just 12 per cent of the restructured company and not the 18 per cent it is pushing for, in exchange for its €45 million to €50 million equity injection.

Digicel must feel it can better STT’s offer if it has made contact at this stage.

The Communications Workers’ Union has rightly advised its members to reject bids that involve “fancy financial engineering” and cautioned that any proposals will have to address Eircom’s €3.8 billion debt pile “once and for all”.

It remains unclear how Digicel intends to finance its proposal. It already had debts of about €3.3 billion and is investing heavily in its networks in the Caribbean.

Any new owner at Eircom will also need deep pockets as the independent directors, who will recommend a proposal to the company’s senior lenders, want bidders to highlight their plans for investment in its network.

With Eircom facing the possibility of a sixth owner in just over a decade, it’s a question that can no longer be kicked down the road.

New PM facing  tough Italian job

THE FAILUREof Mario Monti's appointment as Italian prime minister to ignite a revival in Italian bonds should not have come as any surprise. But the knock-on effects for Spanish bond prices is a warning – if one was needed – about how high the stakes have become for the euro zone.

Even if Monti succeeds in assembling his government of technocrats in the coming days, investors will continue to worry both about the ability of his government to get reforms through the Italian parliament, and the time it will take before such reforms can have any real effect on Italy’s growth prospects.

If he can succeed in reassuring investors on both fronts, then Italian yields will come down and the country will avoid a bailout. Failure to do so could see Italy enter a Greek-style death spiral with austerity measures and growth chasing each other down the plug hole.

The additional interest payments associated with the current elevated yields on Italian debt alone would eat through the €60 billion in growth-generating savings agreed by parliament and which Monti is charged with delivering.

The good news, if that is the word, is that Bill O’Neill, chief investment officer for Europe at Merrill Lynch Wealth Management, believes that the favourable current average yield paid on existing debt, as well as an average debt maturity of about seven years, means the government can actually sustain current high yields for longer than is often perceived.

Italy also runs a primary budget surplus, which is forecast to increase in the coming years, O’Neill argues.

But whether this will buy Italy the time it needs is open to question. If it doesn’t, then the options to buy Italy more time are very limited given the refusal of the Germans to countenance Eurobonds or unlimited ECB support.

A leveraged European Financial Stability Facility still seems some way off, leaving only the limited bond-purchasing programme of the ECB.

Today

EU-17 Flash GDP number for the third quarter due, as is an interim management statement from CRH

Online

You can get the latest news each business day at irishtimes.com/business or by following us on Twitter at twitter.com/IrishTimesBiz. We also have a Facebook page at facebook.com/IrishTimesBiz where you can read the latest business headlines, blog posts and reader polls.