Eircom trust bids to keep tax-free profit sharing

THE EMPLOYEE trust that owns more than a third of Eircom is seeking approval from the Revenue to allow it to continue making tax-free distributions to members if the former State telco is sold to Singapore Technologies Telemedia (STT), a unit of Singapore’s sovereign wealth fund.

The Eircom employee share ownership trust (Esot), estimated to have paid out more than €750 million to its 14,000 members since the company was privatised a decade ago, has agreed in principle with STT that it will retain its 35 per cent stake in the firm if a takeover deal goes ahead.

STT, which increased its bid for Eircom in recent days, is now engaged in final talks with the company’s 57.1 per cent shareholder Eircom Holdings (ERC), an investment fund listed on the Australian Securities Exchange. News overnight of the increased bid sent ERC’s shares 10.09 per cent higher to a level that implies a market capitalisation of 201.49 million Australian dollars (€117.85 million), down 39.5 per cent in a year.

Bid documents supplied to the stock market in Sydney show that the Esot has told STT that its participation in a scheme of arrangement is conditional on “certain confirmations” being received from the Revenue.

This is widely held to be a reference to a requirement for fresh approval from Revenue for the Esot’s ongoing tax arrangements should Eircom’s ownership change. The Esot uses an approved profit-sharing scheme to make annual tax-free distributions, to a maximum of around €12,800, to its members.

This structure facilitated big payments to staff and former staff even as the Esot accumulated cash and increased its stake in Eircom to 35 per cent from its initial 14.9 per cent shareholding. Agreed with the tax authorities at a time when the public finances were much healthier, it was renewed on a number of occasions. In its new proposal, STT increased to the equivalent of €40 million from under €30 million the premium it would pay to buy ERC’s entire share capital.

The premium would be in addition to a €95.25 million distribution of ERC’s surplus cash, valuing the entire bid at about €135 million. Such figures reflect the high level of leverage that STT would take if it acquires ERC’s stake in Eircom, whose debt exceeds €3.35 billion.

Although ERC said yesterday that this “definitive” proposal from STT includes certain terms and conditions that its board “cannot recommend”, its chairman Kerry Roxburgh is said to have taken direct charge in Singapore of the fund’s negotiation with STT.

ERC did not specify the terms in question but suggested they were unacceptable “in their current form”, keeping open the possibility that amended terms would find support.

ERC will continue to negotiate with STT “to seek to improve the proposal and the terms and conditions to which it is subject” with a view to reaching an outcome that would enable its board to recommend a proposal, it said.

Close observers believe Eircom and the Esot expect the talks process to conclude within days, possibly early next week.

In the event of a takeover, the bid documents suggest Eircom shareholders holding at least 25 per cent of shares in the transaction vehicle will have the right, after three years, to request it to facilitate an initial public offering on a recognised stock exchange.

A deal would be subject to the approval of the Esot’s members.

“The obligations of the Esot in respect of the proposal are to be set out in a participation agreement to be entered into” between the Esot, STT and the transaction vehicle. It is also proposed that the Esot will assist ERC in meeting some of ERC’s obligations under the deal.