Eircom comes to market... again

The yields on offer are more commonly associated with utility companies, writes John McManus

The dividend policy pretty much tells the tale of Eircom's second coming. In order to ensure that they get the flotation away, an extremely attractive policy was set out in the prospectus published yesterday.

Each year the company plans to pay to shareholders half of the cash it will have left in its coffers after paying its tax bill, the interest and repayments on its debts, and spending around €200 million on capital investment. All else being equal, this will come to €81 million in the coming financial year, representing a payment of around 11 cent per share.

In yield terms (dividend as a percentage of the price of the shares), this works out at just under 6.8 per cent.

These are the sort of yields more commonly associated with utility companies than telecoms firms and reflects the fact that, as a business, Eircom has more in common with Severn Trent Water - currently on a yield of 6.2 per cent - than Deutsche Telekom (2.3 per cent) or Vodafone, which is on yield of 1.4 per cent.

The reason is that Vodafone is the world's largest publicly quoted mobile company and all the growth in telecoms is expected to be in mobile.

Eircom, on the other hand, will be able to lay claim to being the world's smallest publicly quoted fixed-line operator. It has no mobile business and has only modest ambitions to re-enter that market, which it exited in 2001 with the sale of Eircell.

Its nearest peer, BT, sold off its mobile operation mmO2 and currently is on a prospective yield of 6 per cent for next year.

Eircom may be priced "to go", but that is not to say that exiting shareholders will not make a substantial profit. It will be sweetened by the favourable movement of the dollar versus the euro in two years since they invested, which could add up to 20 per cent to their profit.

The five main shareholders in Valentia put up €676 million in November 2001 to buy Eircom. The rest of the €3.2 billion purchase price was a mixture of borrowing and €247 million advanced by the Eircom Employee Share Ownership Trust (ESOT) in the form of preference shares.

Their first pay day came last year when the company refinanced the debt and found the wherewithal to pay the investors a €400 million dividend.

But an even bigger payout beckons in two weeks when the company returns to the market. On the basis of a share price of €1.62 (the middle of the suggested range) the exiting shareholders will raise €531 million.

The bulk of this will go to Providence Private Equity, the main backer of the 2001 buyout. It should receive up to €396 million which, taken with its share of the special dividend, represents a profit of around €280 million on its initial investment of €314 million. When you add 20 per cent for the dollar's fall, it is a return of in excess of 50 per cent a year.

Soros Private Equity will have turned its €125 million stake into shares worth €158 million on top of a dividend payment of around €40 million last year.

Sir Antony O'Reilly, the non- executive chairman, invested €25 million. He plans to sell his shares, now worth €45 million, representing a profit of €20 million on top of his €10 million dividend last year.

Goldman Sachs, which advised Valentia in 2001, also took a €10 million stake. Its shares will be worth €12.64 million and its dividend payment was some €8 million.

The companies executives and directors have around 10 million shares, which will be worth €16 million. Most of their shares were purchased after the 2001 buyout for approximately 12 cents per share.

The only shareholder not selling is the ESOT. It will see the value of the €202 million it invested in 2001 rise to €260 million. It also received a share of the 2003 dividend and saw some of the €247 million in preference shares it invested in 2001 redeemed. The equity invested by the ESOT in 2001 was a reinvestment of the proceeds from the sale of its 15 per cent stake in the original Eircom. The ESOT paid for this original stake through a mixture of industrial relations agreements and borrowings of around €130 million.

The ESOT plans to spend up to €85 million buying shares in the initial public offering to minimise the dilution of its stake. It will also convert the last €66 million worth of preference shares in Valentia into the equivalent value of of preference shares in new Eircom. The new preference shares will, over time, convert into ordinary shares, subject to a restriction that the ESOT's holding of ordinary shares does not exceed 29.9 per cent.

The ESOT plans to distribute its shares in Eircom (and its other assets) to its 12,000 or so members over the next 10 years. The maximum it can distribute tax free to members in any one year is €12,700 per member or €124 million in total.

ESOT members have much to look forward to, but only if the Eircom share price holds up. And that will only happen if the company can deliver on its aggressive dividend policy.

This, in turn, will only happen if it defends its revenue streams, continues to cut costs and finds some way of growing its business - either in mobile or broadband. Simple really.