Valentia hopes preference shares will swing vote

Valentia Telecommunications plans to seek an early listing for its preference shares in order to make them more attractive to members of the Employee Share Ownership Trust (ESOT). The 13,000 members of the ESOT are in process of being balloted on whether they want to accept a takeover offer from Valentia or a rival offer from eIsland.

Valentia sources have indicated that it will create a market in the preference shares - €227 million (£179 million) of which will be held by the ESOT - well ahead of the five-year deadline envisioned in the shareholder agreement with the ESOT. This would allow an early distribution of the preference shares to ESOT members who would could sell them for cash.

The move is intended to counter one of the more attractive elements of the eIsland proposal. The eIsland consortium, led by Mr Denis O'Brien, has designed its offer in a way that would allow the early distribution to ESOT members of more than €200 million in cash that the ESOT will receive. The surplus arises because both eIsland and Valentia are mounting leverage buyouts (LBO). Under both schemes the ESOT will get around €450million for its existing 14.9 per cent stake and will have to reinvest around €200 million to acquire 29.9 per cent of the LBO vehicle.

Under the Valentia deal the surplus has to be invested in the preference shares in the LBO vehicle, which will be the parent of Eircom. The preference shares have no voting rights but earn 11.5 per cent interest. There will be no automatic market for them and their value will depend on Eircom's economic performance and interest rates. If Valentia obtains a listing for the shares it can create a market for them but cannot guarantee the cash value will exceed what the ESOT paid for them.

The eIsland proposal involves the issuing of loan notes that have a fixed value and can be cashed in at any time. In documentation sent to members yesterday, the ESOT trustees point out that "the cash-backed loan notes are a very low-risk investment compared with the 11.5 per cent preference shares". But the trustees add that this does not outweigh the other drawbacks with the eIsland offer.

The trustees have recommended members accept the Valentia offer, which would result in "a meaningful partnership with fellow investors that it knows and in whom it has confidence".

An eIsland spokesman said last night that "unlike Valentia, eIsland was not using the employees proceed from the sale of Eircom to fund the acquisition". The ballot will conclude on August 27th.