After many false starts the race for Eircom would appear to be under way. As of Monday night a firm offer is on its way to shareholders and the timetable set out in the City code for takeovers and mergers now applies.
Shareholders have until August 13th to accept the #1.36 per share offer from eIsland, the grouping led by Mr Denis O'Brien. Valentia, the rival consortium of which Sir Anthony O'Reilly is non-executive chairman, can make a formal counter-offer at any stage before that date, which would lead to the setting of new deadlines for both offers and the possibility of an increased offer from eIsland.
Valentia can be expected to move well before deadline. It already has a commitment from Comsource, the largest shareholder in Eircom to support its proposed lower offer of #1.27 per share. Comsource - a joint venture between KPN of Holland and Telia of Sweden which owns 35 per cent - can get out of the deal if Valentia does not match eIsland's offer by Monday week.
Comsource is, however, a subplot to the main drama, which centres on the Eircom Employee Share Ownership Trust which owns just under 15 per cent of the company. Any successful bidder must get acceptances from shareholders controlling at least 80 per cent of the company making the support of both Comsource and the ESOT vital. While Comsource can be expected to support the higher offer regardless of who makes it the ESOT has refused to switch its support from Valentia to eIsland.
A round of talks between the advisers to eIsland and the ESOT failed to make any progress by last Monday and the employee trust remains wedded to the Valentia camp.
The ESOT is understood to have voiced a number of concerns about the eIsland offer, the most significant being the extent to which it relies on trust. Under stock exchange rules the ESOT cannot enter into any transaction with eIsland for six months after selling its shares in the takeover. This means that it will have to rely on the word of Mr O'Brien and his advisers Investment Bank of Ireland and JP Morgan that they will be allowed buy 29.9 per cent of the company for #180 million. The fact that eIsland and its advisers have stated their intention to allow them do so in a formal stock exchange document is a significant source of comfort and the parties can apply to the Irish Takeover Panel for a waiver of the rule once the deal has gone through. It is understood that attempts to get a waiver ahead of the bid were not successful.
The problem does not arise with the Valentia bid because the ESOT is joining the consortium and is in the process of balloting its members for their approval. The ESOT's decision to participate in the Valentia bid will be at the heart of eIsland's campaign to win support for its bid. It will point out that as a member of the consortium the ESOT is not only paying #188 million for 29.9 per cent it is also having to put in an additional #223 million of equity in the form of preference shares. The ESOT will contribute 42 per cent of Valentia's capital requirement but hold only 29.9 per cent economic interest according to eIsland.
The ESOT trustees can argue that the preference shares - which have an attractive interest rate - represent a sound investment for the trust and will increase its influence over Valentia. There is no doubt that banks and other investors will be willing to buy the preference shares and eIsland plans to issue #290 million of them as part of its bid. The key point is whether the ESOT should be investing its members' money and a significant chunk of the proceeds of the Eircom sale in financial instruments that are designed for professional investment managers with very different agendas. EIsland proposes that the cash should be distributed to ESOT members instead.
The ESOT is also understood to have objected to Mr O'Brien and his management team being offered shares in eIsland at a slightly cheaper rate as an incentive.
The ESOT trustees have a difficult decision to make, but if Valentia increases its bid they may yet be saved the trouble.
