Eircom much more than just a business

By this day fortnight the 13,000 members of the Eircom Employee Share Ownership Trust will have spoken on who they want to take over the company. The clear favourite is Valentia Telecommunications, the consortium chaired by Sir Anthony O'Reilly, which commands the support of shareholders owning 53 per cent of the company, including the ESOT (subject to confirmation by the current ballot). The underdog is Mr Denis O'Brien and his eIsland consortium who must win the support of the ESOT rank and file if they are have any chance of getting back in the race.

Both parties have bid close to €3 billion so the financial consequences of vote for the 450,000 small shareholders are minor. It is a fair question whether we should really care about the vote and which US leveraged buy-out fund the union- controlled ESOT wants to get into bed with.

In the normal way the answer is probably no, but in the case of Eircom it is yes. Eircom is more than just a business, it is owner of the vast bulk of the Republic's telecommunications infrastructure and set to remain so for the foreseeable future. The company is heavily regulated and must meet various minimum standards, including universal coverage, which are a legacy of its past as a State-owned monopoly.

What cannot be dictated by the State is the future development of the Eircom network, a key component of the Government's economic plans. Its growth will first and foremost have to fit with the new owner's requirement for a return on its investment of around 20 per cent a year.

Given the consequence of this change in ownership it is surprising - or not surprising some would argue - that the Government has fought shy of the issue. The only involvement would appear to be the agreement of Mr McCreevy, the Minister for Finance, to change some minor tax laws to facilitate Valentia.

The Government would argue that the scenario outlined above has pertained since the flotation of Eircom - not a subject it wants to revisit in any hurry - and everything is fine. This does not hold water.

Eircom is a strongly profitable, debt free business with a public listing and a diverse shareholder base. It is about to become a private company controlled by small number of individuals who have borrowed €2 billion to buy it and which has to be serviced out of funds that could have been used for investment.

One of the US venture capitalists involved in the takeover battle has privately admitted to amazement at the Government's lack of interest. He was specifically referring to Sir Anthony's involvement in Valentia.

Not one member of the Cabinet seems to be alive to the consequences of an individual who dominates the print media and is a major player in cable television becoming a key player in telecommunications.

Sir Anthony's involvement will almost certainly clear any regulatory hurdles that might stand in its way. But it would be naive in the extreme not to expect a businessman of his calibre to leverage every possible advantage for Independent News & Media out of his role as chairman of Valentia.

Mr O'Brien, of course, has had his difficulties. A number of financial dealings with which he may have been associated are currently being investigated by the Moriarty tribunal. Leaving that aside, he is no fan of organised labour and like most successful entrepreneurs has taken commercial risks that others would not countenance.

To a certain extent the ESOT is caught between a rock and a hard place.

Both Valentia and eIsland have much the same agenda at the end of the day. Both are offering very similar deals. The ESOT will get around €450 million for its existing stake and will be invited to buy 29.9 per cent of "new Eircom" for roughly €200 million.

There are differences between the two in terms of business plans and the debt structure and also what happens to the €250 million surplus on the sale.

EIsland proposes the money is repaid to beneficiaries via a tax efficient mechanism involving loan notes.

Valentia envisions that the surplus is re-invested in preference shares that will have no voting rights but earn interest at 11.5 per cent a year.

One view of the preference shares is that the ESOT has been required to invest in this security - which is more risky than providing a secured loan to Valentia - as a condition of participating in the deal.

The other view - and the one put forward by Valentia - is that the preference shares were a way of allowing the ESOT invest more of its cash back into Eircom.

Valentia argue that the preference shares are not all that different from the eIsland loan notes because they can also be distributed to ESOT members.

It is not strictly the case as the loan notes can be cashed in at any time for their face value, while for ESOT members to be able to sell the preference shares Valentia will first have to obtain a listing for them.

Even when they are listed their value will be a function of factors such as interest rates, inflation and the financial performance of Eircom.

The extent to which the ESOT can influence Eircom's performance is subject to negotiation with the other shareholders. The ESOT may currently be best friends with Mr John Hahn's Providence Equity Partners and the other co-investors but the honeymoon will eventually end.

Mr O'Brien's backers are every bit as focused on the bottom line as Valentia's, but his scheme would allow the ESOT to keep some distance between itself and its partners while not putting all its cash into the Eircom basket.

Mr Con Scanlon, the chairman of the ESOT and not one to shy away from a fight, would rather get in among the foe and with as much fire-power as he can muster.