O'Brien still faces tricky hurdles in Eircom bid

Unions at Eircom have told Mr Denis O'Brien they will only support his bid for the company if they can more than double their 15 per cent shareholding.

The Employee Share Ownership Trust (ESOT), which holds the shares on behalf of staff, made its position clear to the eIsland consortium led by Mr O'Brien in discussions over recent weeks. The businessman has yet to formally respond.

Mr O'Brien wants to buy the rump of Eircom following the sale of Eircell, the mobile division, to Vodafone next month. He has indicated that he is prepared to pay in the region of #2.2 billion for the remaining non-mobile businesses.

His bid is unlikely to succeed without the unions' backing. If the ESOT comes out against the deal they will form a rallying point for the small shareholders who own another 15 to 20 per cent of the company and are unlikely to be willing sellers. EIsland needs the support of shareholders controlling 80 per cent of the company before it can compulsorily acquire the outstanding shares and take the company private. The ESOT wants to use some of the #500 million it will receive from the Eircell deal to increase its shareholding in Eircom if the company is taken over.

The trust will be paid in Vodafone shares, but could either sell them or borrow against them.

EIsland is expected to decide within the next few weeks whether to proceed with a bid. Once it has declared its hand a rival grouping headed by Mr Dermot Desmond is expected to make its intentions known.

The terms of the Eircell sale may present a further obstacle for Mr O'Brien. Vodafone has made it a condition of the deal that Eircom maintain its net assets above #500 million for two years after the sale and above #200 million for a further four years. The requirement is part of the non-compete agreement entered into by Eircom and is intended to ensure that if Eircom breaks the agreement there are sufficient assets to make it possible to enforce the warranty.

An indirect consequence of the restriction will be to limit the amount of debt that a potential buyer of Eircom can raise. Both Mr O'Brien and Mr Desmond are understood to be contemplating highly leveraged bids, where up to 80 per cent of the purchase price will be raised as debt. They will now have to structure their finances so that total borrowings are at least #500 million below the company's assets which are in the region of #1.9 billion. Corporate finance sources said yesterday that if Mr O'Brien was to proceed with a #2.2 billion bid he would have to find #700 million in equity. The net asset restriction does not constitute a "poison pill", according to industry sources but makes any takeover more difficult.