Troubled Babcock may put Eircom up for sale

ANALYSIS:Even if it is not sold in the current crisis, a bidder could take a position in the company, writes Arthur Beesley

THE MOUNTING troubles in Australia of Babcock & Brown, the bank that has ultimate control over Eircom, are likely to hasten the day when the Irish telco comes on the block again.

The bank manages Eircom owner Babcock & Brown Capital (BCM), a listed fund in which it has an 8 per cent stake. This is but one of numerous vehicles through which the bank has brought power, energy transmission, rail, aircraft and other assets to the public market.

As Babcock fights a full-blown collapse in investor confidence and faces into a review by its lenders of A$2.8 billion (€1.7 billion) of debt, it is likely to sell some its most disposable assets to shore up its share price. For example, the bank expects to complete the sale of a portfolio of European wind power assets before autumn. These could fetch as much as A$2.5 billion.

Yet while Eircom may not come into play in the first instance, it is becoming increasingly difficult to envision a long-term future for the company in its current ownership.

Thus the Eircom employee share ownership trust, which owns 35 per cent of the business, is likely to be watching events in Australia very closely.

At the end of a disastrous week in which Babcock's market value more than halved amid investor worries about heavily-indebted companies, fundamental questions about its business model are ringing louder than ever. After initiating a review of its funds only a fortnight ago and apologising for the poor performance of their shares, events this week serve to intensify their difficulties.

With the credibility of Babcock's management now seriously undermined, the extent to which it can continue to operate funds into the future even if it weathers the current storm remains unclear. Suffice to say that much will depend on the stance of bankers to Babcock, whose balance sheet carries a total of A$11 billion in debt.

In the case of BCM, whose only other asset besides Eircom is the Israeli Golden Pages business directory, investors have already forced a strategic about-turn. In February, the fund dropped plans to make A$445 million in new investments. Instead, it is buying back half its shares.

If alarm bells ring when an investment fund stops investing, BCM's share price tells all. Down 14.33 per cent yesterday, the current price implies a market capitalisation on the fund of only A$561 million (€342.42 million). Eircom looks like a distressed asset in that context. After all, the business was acquired at a cost of €2.36 billion in 2006 and it is saddled with debts of €4.26 billion.

It isn't a pretty picture and Babcock's own struggle for survival means BCM will not be top priority. Even if Eircom is not plucked out for disposal in the current crisis, there is every possibility that a potential bidder could take advantage of BCM's weak share price to take a position in the company.

BCM itself has already mooted the possibility of a transaction in the medium term with a European incumbent telco. Events this week could bring forward such an engagement. This story is moving.