EIsland increases offer and wins Eircom board backing

The Eircom board has recommended acceptance of a new offer of #1.36 per share which the Denis O'Brien-led consortium made late on Thursday night, saying it is in the best interests of shareholders. This morning eIsland issued what is known as a 2.5 document, an abridged version of the offer outlining the terms of the deal. It precedes a formal offer and will be sent to shareholders early next week.

The board's recommendation means Comsource, the KPN-Telia consortium which owns 35 per cent of the company, will be freed from the irrevocable guarantees it gave to rival bidder Valentia. Only a bid above #1.355 could have unwound the Comsource undertaking.

The unanimous recommendation was made following an all-day meeting yesterday. Analysts described the eIsland bid last night as "very full".

There was heavy trading in Eircom shares yesterday - more than 3.5 million in Dublin and London - with the share price closing up four cents at #1.31. Market sources said this underlined the belief that the eIsland bid would be accepted.

The bid values the firm at #3 billion. Once eIsland makes a formal offer, expected within two weeks, Valentia has a further 14 days either to match it or better it. If it fails to do so, Comsource will be free of its undertaking to sell its shares to Valentia. EIsland still has to win the support of the Employee Share Ownership Trust (ESOT) which holds 14.9 per cent of the company.

Its acceptance of the deal is deemed crucial as eIsland needs 80 per cent acceptances from shareholders for the deal to go unconditional, effectively allowing it to compulsorily buy shares it does not already own. Even with Comsource free of its commitments to Valentia, it would be difficult to reach 80 per cent without ESOT support.

The ESOT was not party to the discussions yesterday as it would have had a conflict of interest. Comsource was absent for the same reason. Only seven of the 12 directors were at the board meeting.

Last night the ESOT issued a statement saying it had not yet seen the eIsland proposal. It said it had carefully reviewed every proposal to date and had been "cognisant of its fiduciary duties as a trustee".

It expressed reservations that the eIsland proposal was "strongly identified with one individual" [Mr O'Brien].

It also said the Valentia consortium's private equity investment approach was more closely aligned with the Trustee's obligations as a fiduciary holding participants' assets than the entrepreneurial approach represented by eIsland.

EIsland is likely to begin an intensive campaign to win over the ESOT. Analysts said the eIsland offer was a clean one, abandoning the previous formula of a combination of cash plus warrants. These warrants were the promise of a small additional payment up to three years following acceptance of the deal, but featured a lower cash element.

Despite the increased offer, Eircom shareholders are still nursing heavy losses. At yesterday's close, taking the Vodafone share value into account, shareholders will get back a total of #2.585 per share if the eIsland bid is successful, still a long way off the #3.90 flotation price.