ComReg powerless to veto Eircom takeover

Telecoms regulator ComReg would have no power to veto a takeover of Eircom by the Australian investment fund Babcock & Brown…

Telecoms regulator ComReg would have no power to veto a takeover of Eircom by the Australian investment fund Babcock & Brown Capital, even though such a deal might increase the Irish telco's debt to more than €3 billion, writes Arthur Beesley, Senior Business Correspondent

Babcock & Brown is proposing a leveraged buy-out of the former State company for some €2.4 billion.

While advisers to the two sides will not conduct formal meetings until next week, informed observers believe that a transaction would easily have the potential to increase Eircom's debt by more than €1 billion from the current level of about €2 billion.

The Irish company is likely to examine in the coming weeks whether this would impede its ability to make capital expenditure of some €400 million this year and next as it integrates the Meteor mobile business and strives to grow its broadband business.

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Crucial to this examination will be scrutiny of the financing arrangement that the Australian fund proposes to put in place. Market sources believe this will inevitably involve a big component of debt, a factor that could compromise Eircom's capacity to invest in telecoms infrastructure.

While ComReg is likely to examine any proposed transaction from the perspective of whether it would enhance competition in the market, it could not veto a deal per se.

The regulator can examine whether the new entity offered universal access to basic services and transparent pricing but it would be unable to stop a transaction if, as expected by the market, Eircom's network was formally split from its retail division.

Industry analysts believe that Babcock & Brown would be likely after such a split to take a dividend from the network business and increase its debt. Babcock & Brown is predicting an annual return in excess of 15 per cent from a takeover, possibly compromising its ability to invest in the network.

There was no comment yesterday on the preliminary approach from either Babcock & Brown or Eircom. The telco's shares finished one cent weaker at €2.20 on the Dublin market yesterday in much thinner trading than on the previous day.

Traders in Dublin believe Babcock & Brown has increased its stake in Eircom above 18 per cent and is likely to continue buying the telco's stock in the coming weeks towards the 29.9 per cent threshold that would trigger a mandatory bid.

In addition, traders said the market had taken the view that a bid would ultimately be priced in the region of €2.30 per Eircom share, some 12 cent lower than the mooted offer late last year from Swisscom. While advisers to Babcock & Brown are believed to have made an informal approach to advisers to the Employee Share Ownership Trust, which controls 22 per cent of the telco, a formal engagement is not expected for some time.

Babcock & Brown's parent posted better than expected results on Wednesday in Sydney and said the pipeline for transactions was strong. Net profit in 2005 grew 251.6 million Australian dollars (€155.93 million) from A$96.8 million.

Managing director Phil Green said it was "certainly" possible that the fund would make a full bid for Eircom. Asked whether a hostile bid was likely if Eircom did not want to do business, he declined to comment. "I'm not ruling it in, or ruling it out."