Eircom ESOP may prove to be a poison pill

David Begg must be feeling pleased with himself. His brainchild - the Eircom Employee Share Ownership Plan - has succeeded beyond his wildest dreams. Not only has it secured in the region of £50,000 (€63,487) worth of shares for every member of staff, it has also given them something close to the whip hand in determining the company's future.

The other architects of the ESOP, the Eircom chief executive Mr Alfie Kane and the Minister for Public Enterprise, Ms O'Rourke, may be less pleased with their handiwork.

Mr Begg has moved on to work for Concern, but Mr Con Scanlon, his successor as head of the Communications Workers' Union and prime mover in the ESOP has been no slouch when it comes to flexing the grouping's muscles.

Mr Scanlon and his fellow trustees threw a spanner in the works during the closing stages of the negotiations between Eircom and Vodafone over the sale of Eircell last December. They pointed out that Eircell staff would have to give up their rights to shares in Eircom under the ESOP if they went to work for Vodafone. Not so, said Mr Kane who wanted the ESOP restructured to allow the transferring workers retain their rights. Not possible, replied the trustees who then threatened industrial action in the role as union bosses. Not surprisingly Mr Kane gave in and agreed to pay £22 million (€28 million) to set up a new ESOP for the transferring workers.

The ESOP's intransigence may have been related to an earlier run-in with Mr Kane. Last autumn the ESOP tried to buy part of the 35 per cent of Eircom held by Comsource, the company's Dutch and Swedish strategic partners, KPN and Telia. The ESOP offer was potentially the solution to a difficult problem as Comsource's trouble finding a buyer was pushing down an already depressed share price.

In order to facilitate the deal the trust deed that established the ESOP prior to the flotation would have had to be rewritten. This, however, needed the support of Mr Kane as Eircom was a sponsor of the trust. He flatly refused to do so as from his point of view a company 50 per cent owned by its staff was next to ungovernable.

The ESOP trustees are due to meet shortly to decide whether to support the Vodafone deal. Their support is not necessary as Eircom and Vodafone already have enough votes in the bag to push through the sale. The ESOP's support is not automatic, but would be expected on the basis of a deal already agreed.

Like anybody else reading the 275 pages of documentation sent out by Eircom and Vodafone, the ESOP will have been struck by the fact that less than half a dozen pages have been devoted to giving reasons for the deal. Eircom's management seems at a loss when it comes to finding reasons to justify the consummation of the four-month-old agreement. The best a very senior executive could come up with was describing it as the equivalent of swapping your savings out of the Bolivian dollar into the US dollar with Vodafone shares playing the role of the greenback. "You would do it if you got the chance," he said.

THE extent of the ESOP's power will become apparent in the aftermath of the demerger. In the absence of any bid for Eircom materialising the ESOP will once again look to increase its stake in the company using the €500 million worth of Vodafone shares it will then hold. Mr Kane can be expected to resist its approaches, but he must keep the unions on board if he is serious about restructuring the fixed-line business.

The ESOP has already set out its stall in terms of what it wants from any prospective bidder. Anyone looking for its support must be prepared to allow it increase its stake substantially, with figures in the region of 40 per cent being talked about.

It is hard to see Sir Tony O'Reilly, Mr O'Brien, or Mr Desmond for that matter, being very happy with such an arrangement and the ESOP may yet prove to be a poison pill.

Eircom's management is not the only stakeholder which may come to rue the creation of the ESOP. The appalling performance of the Eircom share price over the last 12 months has meant that the interest of the ESOP is quite closely aligned to those of the small shareholders. In particular the ESOP has the potential to act as rallying point for those small shareholders who oppose the sale of the business to oportunistic buyers. Any bid would need the support of shareholders representing 80 per cent of the equity.

Small shareholders and the ESOP could be less comfortable bedfellows if - as seems likely this morning - a genuine bidding war breaks out between Sir Tony and Mr O'Brien. The ESOP will almost certainly still hold out for an increased stake even if the price is right.

The Government - in the guise of the Minister for Public Enterprise - might also wish she had been less generous in 1999 when she gave 15 per cent of the company to the Eircom employees in part exchange for a transformation agreement. It set a precedent that the Government would find hard to break if it ever rediscovered its enthusiasm for selling State assets. If Aer Lingus, the ESB and Aer Rianta ever made it to the stock market, investors would expect some sort of a discount in recognition of the risks associated with having an ESOP throwing its weight around.

jmcmanus@irish-times.ie