Debt-laden Eircom likely to attract discount in fire sale

BUSINESS OPINION: EIRCOM LOOKS set for its fifth change of ownership since its privatisation less than 10 years ago.

The meltdown of its current master, the Australian finance house Babcock Brown, means that Eircom, along with any other saleable asset held by its portfolio of satellite funds, is now in effect on the market.

No value has been put on Eircom at this stage but a heavily indebted telco with an aging network in an economy that has slowed to a crawl is not a very appetising morsel.

The jewel in the crown is Meteor, its mobile phone division, but the Irish mobile market is in effect ex-growth and all the players in the business are looking to cut costs.

On this basis you could argue that of all the assets held by the various funds it manages, Eircom is probably one of the less attractive and thus likely to attract the biggest discount in what is set to be a fire sale.

This may be true but Babcock Brown has more than one reason to exit Eircom. And the current crisis at the Australian finance house will provide cover for BCM - the fund that actually owns Eircom and is managed by Babcock Brown - to extract itself from what has proved a costly misadventure in Ireland.

The inevitable losses associated with BCM's sale of Eircom will be blamed on the distressed nature of the sale, rather than the alternative explanation that Babcock Brown paid too much for Eircom and that the plan to unlock value in a company that had already been leveraged to the hilt has floundered.

The complex piece of financial engineering that lay behind Babcock's investment thesis has proved impossible to execute.

Structural separation, whereby the retail business would be sold off while the infrastructure business would be retained as a long term investment, proved to be a non-starter from the point of view of the government, unions, regulators and other interested parties.

It was always going to be a hard sell, but the company's abrasive, no-nonsense approach did not help.

Babcock's plan B, getting the government to subsidise the upgrading of its network in exchange for a minority interest, did not fly either.

As a result Babcock Brown has driven up a cul de sac and is left with a heavily indebted business that, in order to ensure its long-term dominance of the Irish communications industry, needs to make a substantial investment that it cannot finance.

One can only speculate as to whether this debacle had some bearing on the decision by Babcock Brown to disband the the corporate finance arm, led by Rod Topfer, who masterminded the Eircom takeover.

But, as they say, that is now history.

The issue now - from the point of view of the Government and other stakeholders in the economy - is to ensure that if Eircom has a new owner, it is capable and willing to make the sort of investment necessary to give Ireland the sort of telecommunications infrastructure it needs.

Having sat on its hands and watched a succession of owners load the company up with debt while lining their own pockets and underinvesting in infrastructure, the Government now has a chance to step in and try to undo the damage.

But it's unlikely that it will get directly involved for several reasons, not least that the exchequer coffers are not exactly overflowing.

In addition, the Government's broadband strategy - as recently set out by Communications Minister Eamon Ryan - rules out getting into bed with any one company.

Indeed, this policy was the nail in the coffin of Babcock and Brown's plan B for Eircom.

On the basis of this policy position there is very little that the Government can do to directly ensure that the interests of the next owners of Eircom are more closely aligned to what might be called the national interest than some of the previous incumbents have been.

But, that said, anybody looking at buying Eircom now would at least have a clear idea what Government policy is in this area and should not be counting on any sort of direct investment or financial support.

They will also have a much clearer understanding of the stance of the regulator, something that was not available to Babcock Brown.

New owners would also be buying Eircom with the added benefit of a much more rational view of the prospects of the Irish economy.

In addition, the ongoing credit squeeze means that a financial buyer for the company is unlikely to enter the fray and push the price beyond what the fundamentals of the business can justify.

Which holds out the prospect of a trade buyer who might want to own, operate and invest in the business for what it is; the dominant telecommunications business in an economy that will perform in line with the wider European economy.