Competition and effects of slump spur Eircom to act

Saddled with debt and under pressure from rivals, Eircom wants to cut jobs and costs, writes CIARÁN HANCOCK

A LITTLE after four o’clock on Monday afternoon, an e-mail from chief executive Paul Donovan was sent to Eircom’s 6,500-plus staff.

It addressed the issue of cost reduction following a report last Sunday that Eircom’s management wanted to cut its workforce by another 2,000. This would amount to a 30 per cent reduction in jobs.

His message was clear. “In short, the company will have to change, first in order to survive and second to become a strong company which can, and will, play a central role in our industry,” Donovan told staff.

“Inevitably further reductions in the numbers we employ will be a part of these changes to reduce our costs and to help us become a more efficient organisation.

“We have not yet decided how many jobs will be affected, but the number will be significant.”

Donovan has been careful not to put a figure on the number of redundancies, both in communications with staff and in radio interviews given on Monday.

The 2,000 figure has spooked workers, who for the first time since privatisation in 1999 are concerned about their positions.

Eircom is close to completing a voluntary leaving scheme for 1,200 staff on generous terms. But rumours have circulated within the company recently of offers being withdrawn from people due to a lack of funding. This has been denied by Eircom.

There has also been speculation about compulsory layoffs. Eircom has denied this is on the cards.

On May 17th, four days before the redundancy scheme was closed to applications, Donovan told staff that future leaving schemes would be on “reduced exit terms” as “we cannot afford to continue the current exit terms”.

Like all consumer-focused operations, Eircom’s business has been hammered by the recession.

The competition have upped their game, too, with Vodafone and cable TV operator UPC in particular making significant inroads in broadband and the fixed-line market, offering cheaper products and faster internet speeds.

In the nine months to the end of March, Eircom’s revenues declined by 7 per cent to €455 million while its earnings were 4 per cent lower at €170 million.

The bottom-line contraction was kept to a minimum by an 8 per cent reduction in its cost base. In total, Eircom has stripped €130 million from its cost base over the past two years.

But the core fixed-line and Meteor mobile business is under significant operational pressure, not helped by the regulator’s decision to slash its wholesale prices.

Donovan, just more than a year in the hotseat, has spent the past few months drafting a three-year business plan to address the decline.

In recent weeks, the plan was presented to its shareholders – Singapore-based STT and the employee Esot – unions and senior managers.

STT took control of Eircom in January, paying €48 million. But it has stayed quiet to date on its vision and plans for the business.

It is understood that STT is willing to inject equity into the company but only when a business plan is in place and agreed with the unions.

Similarly, the Esot is believed to have €100 million tucked away to invest in Eircom and maintain its 35 per cent shareholding.

“There are opportunities open to us to increase our market share in mobile and to develop fibre-based products and services,” Donovan said in his note to staff this week.

Building a fibre network to carry high-speed internet is vital to Eircom’s long-term future but the costs are prohibitive.

The company recently announced plans for a €20 million trial in Sandyford and Wexford town that it hopes other telcos here will support financially.

The cost of bringing “fibre to the kerb” is estimated at €500 million while “fibre to the home” has a €2.5 billion price tag.

Donovan has made it clear that Eircom cannot afford to do this alone.

"That will only get built with some collegiate effort," chief financial officer Peter Cross told The Irish Timesthis week.

Sources say the business plan includes a proposal for a separate network company, which might allow other industry players or the government to co-invest in fibre.

Eircom is saddled with a €3.3 billion debt – a legacy of financial engineering by previous owners since privatisation.

In January, Standard Poor’s said Eircom may breach its debt covenants in about a year. Four months later, Moody’s downgraded Eircom’s debt.

In a note on corporate bonds on June 29th, analysts at Jyske Bank said the price of Eircom’s quoted bonds has fallen steeply recently because of concerns that “no information has yet been given to the market about future strategy”.

Cross said speculation about Eircom’s financial health was misplaced. “We have positive headroom in terms of our covenants. We are very comfortably servicing our debts.”

Eircom’s management team have also been keen to impress how its next big payment – €1.23 billion – is not due until late 2014.

Investor Peter Warren bought Eircom bonds about six months ago, investing close to €400,000 of family money. They are now worth about €221,000.

In June, he wrote a stinging letter to the company. “If you intend to default on your debt or in some manner not pay bondholders, which is obviously what the market thinks, I would appreciate it if you had the guts to come and say so,” Warren said.

When put to him this week, Cross said: “No company can manage the debt price day to day, our focus is servicing our debt.”

Donovan wants the new business plan agreed with the unions by October.

The Communications Workers Union will shortly appoint advisers to examine management’s plan and the union will hold a special conference in September to decide its position.

Steve Fitzpatrick, its general secretary, accepts that “difficult decisions” lie ahead for the union.

But, after years of drift for the company, he thinks this process might leave Eircom in better shape for the long term.

“This is a hugely difficult agenda for the unions but we do feel there’s now a sense of direction for the company,” he said.

“We feel there’s real hope for Eircom.”