O'Brien must convince ESOT to change horses

The biggest hurdle facing Denis O'Brien's eIsland in its attempt to acquire Eircom remains the need to win the support of the Employee Share Ownership Trust (ESOT) which represents the interests of employee shareholders. The ESOT, which has been implacably opposed to Mr O'Brien's consortium, indicated strongly last night that it was still backing Valentia.

It likes Valentia's business proposals and its financial structure and seemed miffed that eIsland, which had kept the terms of its offer very tight until yesterday morning, had not spoken to it.

"The ESOT has not had sight of the proposal nor has the board of Eircom sought the ESOT's views in relation to the proposal," it said.

It also stressed that it had engaged in a "considered, deliberate process" in reviewing every proposal made to it in respect of Eircom.

The ESOT has made it clear, albeit unofficially, that it does not want to do business with Mr O'Brien. It feels his bid is too highly leveraged and is overly focused on one individual - namely Mr O'Brien himself.

Sources close to the ESOT told The Irish Times yesterday that the last eIsland bid contained a higher debt to equity structure than the Valentia deal and the ESOT was not happy about this. "Price is not the only issue," said the source. "The eIsland approach would involve a single majority shareholder, as opposed to a something more broadly based."

This was a reference to the fact that eIsland's main backer is JP Morgan Chase and Spectrum, a US venture capital fund, whereas there are four venture capital funds backing Valentia.

"The ESOT has been very careful and has taken due advice," the source added. EIsland is now expected to undertake a charm offensive to persuade the ESOT of the merits of its case. Sources said last night that the amount of debt to equity was similar to that of Valentia's but did not provide specific details. Valentia has said its debt will be #2 billion (£1.58 billion) and its equity #800 million. This is based on its last offer, which was trumped by eIsland, but rejected by both the ESOT and Comsource, the KPN and Telia consortium which holds 35 per cent of the company.

EIsland has also apparently offered to give the ESOT more representation on the board - it is thought that it had been offered two seats previously, by both eIsland and Valentia - and importantly, a veto over certain decisions. This could involve the sale of the company or the sale of particular assets above a certain value.

It is also understood that eIsland will undertake not to instigate any job cuts over and above what has already been agreed between the unions and Eircom. When Eircom is sold, the ESOT will sell its shares - amounting to 14.9 per cent of the company - and then buy 30 per cent of the new company. EIsland sources claimed that under its new proposals, the ESOT will have to reinvest significantly less to buy its shares in the company. "This will leave more in the kitty to disburse to employees," said the source.

For the board's part as it considered the latest eIsland bid yesterday, it was bound by its fiduciary duties to recommend the deal because it was the best offer on the table. Whatever way you crunch the numbers, eIsland's new offer puts very clear water between the two sides. Valentia's bid, in cash terms, is currently languishing at #1.27 per share.

This made it all the more difficult for the Eircom board to reject the offer - the last time, it could perhaps argue that there was less between the two sides and that there were more attractions to the Valentia proposals. Valentia can still match the eIsland offer, although nobody is rushing to predict that it will do so. Once eIsland makes a formal offer, Valentia has 14 days to seek to match it or better it. Analysts say the terms proposed by eIsland are "very full" but they held that view in regard to the consortium's previous two offers.

Officially, Comsource is only unlocked from the undertakings it gave Valentia if Valentia does not match or better the eIsland offer within 14 days.

So what else can eIsland do if the ESOT digs in its heels and refuses to budge? To make the offer unconditional - thereby compelling the ESOT to sell - eIsland needs to win the support of 80 per cent of shareholders of which Comsource represents 35 per cent. Nobody is discounting Mr O'Brien's ability to garner support from the retail investors, who represent 22 per cent of the share register. But as one analyst said yesterday: "If you got 5 per cent of them to respond to the offer, you'd be lucky. . . even 15 per cent is a very tall order."