Eircom unravels to its end

AT 11.06AM yesterday morning in High Court number one, Eircom stood before Mr Justice Peter Kelly with its pockets turned out and pleaded for the green light to enter examinership.

It was a humiliating milestone in the history of the country’s largest telecoms company, once State-owned and valued at about €8.4 billion at the time of its privatisation in 1999.

Eircom is insolvent and relies on the goodwill of its 100-plus lenders to keep the show on the road. It can’t repay the gross €4 billion net debt foisted on its back by a succession of private sector owners since privatisation in 1999.

This in turn has starved its vast network of cables and exchanges of cash for much-needed modernisation at a time when rivals, notably cable group UPC, were busy investing in theirs.

Once totally dominant, a combination of poor management, convoluted ownership structures that stripped it of many of its most valuable assets, and a lack of investment, have left Eircom struggling to be competitive with its rivals.

Eircom’s senior counsel Maurice Collins explained to the court that the company’s debts were not due to “accumulated trading losses” but were the result of “debt undertaken by successive acquisitions”.

It is now proposed to reduce the debts to €2.34 billion with first lien lenders taking control of the equity.

It’s worth noting that if this consensual restructuring proceeds to conclusion, the group of lenders who will take ownership of the business will be its seventh since 1999. It’s a staggering statistic.

Mr Justice Peter Kelly yesterday noted that each time a new owner came on board the debts seemed to rise.

Collins accepted this point, adding that this was not case for Singapore-based STT, which took over Eircom in January 2010 from Australian investment group Babcock & Brown Capital.

STT had thought it could repay Eircom’s debts but this prospect evaporated last year as trading difficulties put pressure on the companys Ebitda (earnings before interest, tax, depreciation and amortisation).

STT and its fellow shareholder, the employee fund Esot, had proposed to inject €300 million into Eircom at one point last year as part of a solution to its financial difficulties. This was rejected by the lenders and STT eventually got cold feet in December, quitting the company while citing concerns about the euro zone sovereign debt crisis.

Denis O’Brien also had a look at Eircom late last year before deciding it was a basket case.

A sale process this year, led by Morgan Stanley, yielded just one bid from a trawl of 108 parties. That bid was rejected by lenders.

Kelly also asked questions about Eircom’s directors. What role did they play in allowing such an unsustainable debt be accumulated?

Collins noted that none of the current board, which is chaired by Ned Sullivan, were directors when the debts of €3.6 billion were racked up.

The government bagged billions from the privatisation of Eircom and much of the windfall was used to establish the National Pension Reserve Fund, which has since been plundered to prop up the insolvent banks.

However, thousands of small retail shareholders had their fingers burned, losing about 30 per cent of their investment by the time it was delisted in 2001.

It was taken private that year by the Valentia consortium led by Sir Anthony O’Reilly, which paid €3.2 billion for the company. They subsequently refloated the company on the stock market before Babcock & Brown Capital took control of the business in 2006 in a deal valued at €2.4 billion.

It’s notable that the debt levels at the end of Valentia’s time was around €2.5 million. At the end of Babcock’s it was around €3.6 billion.

Steve Fitzpatrick, general secretary of the Communications Workers Union, which represents the bulk of the Eircom staff, observes that this is a “cautionary tale” for the government of the pitfalls of proposed “future privatisations” of State assets.

He is right in his observations but current and former staff had their noses in the trough, too. One senior former executive at Eircom estimates the company has paid out €1.2 billion in redundancy payments since privatisation. The headcount over that period has gone from about 13,000 to 5,500 currently. Around 1,500 staff left the business when various bits, such as Eircell and Golden Pages, were sold. The rest got generous redundancy terms.

Thousands of current and former staff have also shared €750 million in tax-free payments through the Esot over the past 13 years.

The Esot has another €130 million or so to disburse to members, according to sources.

It was due to be wound up in 2014 as per an agreement with the Revenue Commissioners but this process could be accelerated now that is no longer a shareholder.

Fitzpatrick accepts many staff have done well out of Eircom in private hands but adds: “You compare what they got to Tony O’Reilly or George Soros [both Valentia investors]. They’re [staff] in the halfpenny place.”

An analysis by the Irish Congress of Trade Unions suggests that O’Reilly made a total gain of €33.5 million from his involvement with Eircom.

Much of the blame for Eircom’s current difficulties is placed at the door of Babcock.

Specifically, the Aussie chief executive Rex Comb and Frenchman Pierre Danon.

They were considered long on promises and short on delivery. Crucially, experienced directors – notably finance chief Peter Lynch and regulatory firefighter David McRedmond – left under the Aussie rule.

The Aussies are blamed for loading excessive borrowings on to Eircom while draining many millions from it in a variety of fees.

Babcock ultimately came a cropper globally and the recession nailed any lingering hopes that they might bag a substantial windfall by flipping it on to another owner.

STT paid only a modest sum to take over Eircom in January 2010. This was the payoff for agreeing to take on the mountain of debt.

Eircom has suffered trading woes in the past year like most Irish telcos but it remains a substantial business. The court heard yesterday how it had in excess of a million fixed-line customers last year. This gives it about two-thirds of the market. Meteor is also the third-biggest mobile operator in the country.

The court was told that Meteor was loss making last year because of depreciation and amortisation costs. The fixed-line business is also under pressure. “That seems to be diminishing fairly rapidly and has been for some time,” Mr Justice Kelly noted.

Mr Collins nodded in agreement. According to the Eircom counsel, its Ebitda will bob around between €465 million and €570 million over the course of the five-year plan.

It Ebitda stood at €669 million in the year to the end of June 2010. Earnings are not expected to increase until the final two years of the business plan – 2015/16 and 2016/17.

In broad terms, the company’s trading position is “expected to be positive” going forward.

Reducing its debt burden will also free up cash for investment in the all-important next generation fibre network. Eircom proposes to spend €1.3 billion on its network over the course of the five year plan.

The independent auditors reports rates the company as having a good chance of prospering in the future if the restructuring is agreed and the various elements of the business plan fall into place. This will also involve 1,000 voluntary job cuts.

Providing the court gives its approval to the proposed consensual restructuring, a new chief executive will be charged with the task of implementing that plan.

Englishman Paul Donovan has decided to exit stage left in December.

Eircom isn’t out of the woods just yet but Fitzpatrick is hopeful that better days lie ahead. “I’m positive, if examinership leaves the company able to pay its own way and if the new owners are willing to support the investment and business plan. We have yet to see absolute proof of that, but I’m positive.”

EIRCOM: THE ROAD TO EXAMINERSHIP

1984Telecom Éireann is formed following the split of the department of posts and telegraphs.

1996State sells 20 per cent stake to KPN Telia for €232 million

May 1999Sale of 14.8 per cent to employee share ownership trust (Esot)

July 1999Telecom Éireann is privatised with state floating its holding on the stock market. Shares debut at €3.90. Exchequer nets €5.6 billion. Company valued at €8.4 billion.

May 2001Mobile phone arm Eircell sold to Vodafone

November 2001Taken private by the Valentia consortium, led by Sir Anthony O'Reilly for €3.2 billion after a battle with the e-Island grouping led by Denis O'Brien. Esot stake rises to 29.9 per cent

April 2004Second IPO on stock exchange. Esot owns 23 per cent

Sept 2005Eircom re-enters mobile market by buying Meteor for €420 million.

October 2005Australian investment group Babcock & Brown acquires initial 12.5 per cent stake in Eircom.

August 2006Taken private by Babcock & Brown in deal worth €2.4 billion. Esot owns 35 per cent. Eircom had debts of €2.54 billion before deal.

January 2010Singapore Technologies Telemedia (STT) acquires 65 per cent of company. Esot remains at 35 per cent. STT pays just €39 million for Eircom but takes on net debt of €3.7 billion.

December 2011STT walks away from company, citing concerns over euro sovereign debt crisis.

March 2012Eircom enters examinership with net debts of €3.7 billion.