Amid all the hoo-haa about who's going to take over Eircom, not a lot of time has been spent talking about what sort of telecom system we are going to have when the deal is finally done.
Are Sir Anthony and his band of Wall Street financiers going to bring us a super-duper service or is the weight of debt that Valentia will have to carry going to mean that Valentia Eircom's huge cash flow will be spent paying down debt rather than investing in telecom infrastructure and improved services.
What is seriously disturbing about Valentia's knockout bid for Eircom is that one of the original backers, Warburg Pincus, has abandoned the Valentia ship, apparently on the basis that the deal has become too rich for them to get any sort of decent return. Okay, you might say the deal still has a lot of Wall Street heavy-hitters on board, but the question that has to be asked of Valentia is whether its determination to do a deal at a price that has staggered many analysts (a few weeks ago analysts said that €1.30 was full value for Eircom) will come at the expense of the service it's going to provide. One assumes Etain Doyle will be keeping a close eye on the privatised Eircom.
Of the €3 billion-odd Valentia is proposing to pay for Eircom, €2.2 billion is going to be borrowed on financial markets. Even if one assumes that Goldman Sachs will be able to cut a good deal for Valentia when it comes to borrowing the money, that is a mountain of somebody else's money. Even a rate of 5 per cent on that €2.2 billion would mean a first-year interest charge of €110 million - and that's without a single euro coming off the principal.
Eircom plc might have its many faults but it enjoys a unique distinction of being a European telecom company with a low level of borrowing. BT, Deutsche Telekom, France Telecom and Eircom's "strategic" partner KPN would give their eye teeth to have Eircom's balance sheet.
ABN Amro's Jemma Houlihan estimates that Eircom's March 2001 equity will be €1.56 billion, which suggests that Valentia Eircom will begin life with a gearing in the order of 140 per cent. She also estimates Eircom's March 2001 interest cover at 21.5 times - God only knows what Valentia Eircom's interest cover will be.
Maybe the laird of Castlemartin and his Wall Street backers will say that it's not appropriate to talk about the new Eircom until they actually take control but, given the size of the leverage in this particular LBO and the amount of cash flow that debt servicing and debt repayment is going to eat up, telecom consumers will need some reassurance that the service they are getting will be not just maintained by Valentia Eircom but enhanced.
