Groundhog Day as Babcock & Brown moves in

You could hardly be blamed for thinking there's something familiar about this morning's news that Australian venture capitalist Babcock & Brown is bidding for Eircom, writes Barry O'Halloran

But a lot has changed in the telecoms company since the State first sold it in 1999, raising €6 billion from financial institutions and the 570,000 citizens who weighed in on the original stock market flotation at €3.90 a share.

In fact, every time Eircom changed hands in the last six- and-a-half years, it looked like it lost something along the way.

The business that Babcock & Brown is lining up to buy has debts of €2 billion, a legacy of the last venture capital buyout. Its last full-year sales were €1.6 billion, compared with €1.8 billion in the year to April 1st 1999, when its liabilities were €540 million.

Back in 1999, its net assets were €1.35 billion. At the end of its last full year, March 31st 2005, they were €549 million, and are unlikely to have recovered dramatically since then.

After Eircom floated in 1999, it rose rapidly to hit an initial high of €5 that August. But, as the technology bubble burst, it dropped away to a low of €2.40 12 months later.

The company then negotiated the sale of its mobile arm, Eircell, to multinational Vodafone. Its shareholders got 0.9478 of a Vodafone share for every two Eircom shares. This ultimately worked out at around €1.25 a unit.

The following year, a bitter battle for the fixed-line business ensued between two consortiums: Denis O'Brien's E-Island, backed by US-based Spectrum Equity, and the Sir Anthony O'Reilly-led Valentia, supported by Goldman Sachs, Warburg Pincus and Providence Equity. The latter won with a €3 billion bid.

Combined with the Vodafone sale, the Valentia deal left small shareholders who bought on flotation with a €1.30 a share loss on their original €3.90 a unit investment.

But it produced one of the saga's big winners in the Eircom Employee Share Ownership Plan (Esop), which held 14.9 per cent of the plc on behalf of its workers. After the sale to Valentia, it wound up with 29.9 per cent of the company and 25 per cent of the voting rights.

It also emerged the winner when Valentia refloated Eircom on the Dublin and London stock exchanges in March 2004 for €1.1 billion. Past and present workers shared a €66 million payout, and a 21 per cent stake in the new plc worth €360 million on flotation.

Sir Anthony O'Reilly, George Soros and Providence Equity sold shares worth a total of €500 million.

The Esop will again be the biggest winner if Babcock & Brown succeeds. Assuming that it took up its new shares in Eircom's recent rights issue, its stake would be worth close to €500 million at the €2.25 that the Australians are said to be willing to pay.

Eircom still controls most of the lines entering the State's homes and businesses. It has re-entered the mobile market with the €420 million purchase of Meteor, which is in third position to Vodafone and O2 with 560,000 subscribers.

But communications regulator ComReg, the Government and its competitors all want to end its dominance in the fixed-line business, and its last results showed that it was feeling at least some pinch in that market.

It also has to deal with that €2 billion debt and industry sources say that its networks are going to require investment, even as it its forced to open them up to competitors.

All in all, it's looking like it will soon be a shadow of what it was in 1999.