The board of Eircom has strongly defended its decision to recommend the #1.32 offer from Valentia Telecom and the rejection of the higher offer from Mr Denis O'Brien's eIsland group. Eircom shares fell 2 cents to #1.38 yesterday, reflecting the view that the Valentia bid will now succeed.
EIsland sent a letter to Eircom over the weekend asked for an explanation why its #1.375 a share offer was rejected. In a letter to eIsland yesterday, it is understood that the board reiterated its view that the eIsland proposal was not an offer that could have been executed given the irrevocable acceptances Valentia has from 35 per cent shareholder Comsource.
A spokesman for Eircom would not comment on the board's letter to eIsland but it is understood that the board expressed its views to eIsland in a very robust manner that made it clear that eIsland had no case. Sources close to Eircom also said the letter to eIsland expressed concern over the eIsland warrants. "The terms for the warrants were not spelled out and there was no detail of what would happen to the warrants in the event of a trade sale," the source said.
He added that while last Friday eIsland claimed that the Comsource irrevocable acceptances came into effect only when a formal offer was made, the company's weekend letter to Eircom tacitly accepted that the irrevocables were in place. Sources close to eIsland would not comment on the latest developments until it has considered yesterday's response from Eircom.
But market sources believe that if Mr Denis O'Brien wants to stay at the bargaining table, then he has no option but to increase his cash bid above the #1.355 a share that would release KPN and Telia's Comsource from its commitments to Valentia. This would cost eIsland an additional #77 million in up-front cash. Claims that the eIsland warrants are the equivalent of cash because they are guaranteed have been dismissed out of hand by sources close to Eircom.
Mr O'Brien's only other option is to try and persuade Eircom's small shareholders - who own 22 per cent of the company - to try and block the takeover by rejecting the Valentia offer en masse. Valentia needs 80 per cent acceptances to make its offer unconditional and a rejection of the offer by small shareholders could in theory block the deal.
The Rule 2.5 document which has been sent to shareholders does not contain much information that is not already in the public domain. It does, however, confirm that Valentia will fund its #2.8 billion offer through #2 billion in borrowings and #800 million in equity. The #800 million equity means that Valentia chairman Sir Anthony O'Reilly will have to pay #32 million in respect of his 4 per cent stake while the Employee Share Option Trust will have to put up #120 million in equity.
The Valentia Rule 2.5 document does not contain any detail on who will actually run Eircom if its offer is successful. There are no details of who the senior management will be and there is also no detail on the servicing charges on the #2 billion of debt that will be required to fund the deal.
But industry sources believe that it is likely that servicing charges for this amount of debt would probably in the order of #60-#70 million a year. This poses serious questions over Valentia's ability to invest in the Eircom business at the same time as it pays interest charges and also progressively pays down its #2 billion starting debt. This opens the real possibility of the State's main telecoms infrastructure being starved of capital investment to allow Valentia meet its own financial commitments.
At this stage, unless eIsland manages to restructure its bid to provide the #1.355 required to release KPN and Telia from their irrevocable acceptances then it seems that Valentia will acquire Eircom at a price that offers 5 cents a share less to the 450,000-strong army of shareholders. Market sources believe that there is little prospect of Mr Dermot Desmond's IIU resurfacing. The same sources said that American investor KKR now believes that the bid price for Eircom has reached an unsustainable level.
