Valentia bid for Eircom requires tax law change

The Minister for Finance, Mr McCreevy, is to be asked to change Irish tax law in order to allow Valentia's #3 billion (£2.36 billion) bid for Eircom to go ahead. The changes are required to enable the Eircom Employee Share Ownership Trust to participate in the Valentia consortium, which is chaired by Sir Anthony O'Reilly.

The trust owns 14.9 per cent of Eircom and plans to reinvest the proceeds from the sale of its stake in Eircom, giving it a 22.9 per cent holding in the new venture.

Before it can do so it will have to change the terms of the trust under which it was established in 1998 to allow the staff of Telecom Eireann participate in the flotation of the group. The changes have to be approved by the Revenue Commissioners in order for the trust to retain the tax status which allows it to distribute shares tax free to members.

They are also needed to allow it invest in some of the complex financial instruments that are being used in the Valentia leveraged buy-out.

The Revenue's approval will in turn be dependent on the Minister for Finance bringing forward a number of amendments to the relevant tax laws. Mr McCreevy has indicated that he was prepared to do so in the context of an earlier but unsuccessful #2.7 billion bid from Valentia.

Sources close to the consortium said last night they were confident that the Minister would be prepared to facilitate them in the context of the #3 billion bid they made on Friday.

Politicians of all parties have studiously avoided being dragged into the Eircom takeover battle which will see the crystallisation of the losses suffered by the 450,000 small shareholders who were encouraged by the Government to participate in the 1999 flotation.

Small investors will have lost almost a third of their original stake based on the #1.365 per share being offered by Valentia.

The need for legislative amendments raises the prospect of the issue now being debated in the Dail.

The consortium confirmed yesterday that it had been notified by the European Commission that it will not be examining the takeover. It will be left to the Irish authorities to establish whether there are any competition issues raised by the takeover. This means that the Tanaiste, Ms Harney, will examine the takeover and decide whether or not to refer it to the Competition Authority.

The Tanaiste will have to decide whether Sir Anthony's involvement in Valentia is sufficient to represent concentration of ownership because he also indirectly controls 50 per cent of the second-largest cable television company, Chorus. Valentia has maintained from the outset that his 4 per cent stake is too small to be material in this context.

EIsland, the rival consortium headed by Mr Denis O'Brien, last night re-affirmed its determination to stay in the contest after Valentia topped its #1.36 per share bid. The consortium would have to bid over #1.50 if it wants to lever Comsource, the largest shareholder, out of an irrevocable commitment to accept the Valentia bid.

A spokesman for eIsland said it will be seeking an urgent meeting with the trustees of the trust. If eIsland can persuade the trust to switch its backing from Valentia then the whole consortium can be unravelled. Mr O'Brien claims that his offer will allow the trust to acquire a 29.9 per cent stake in the business going forward for half of what they will have to invest with Valentia. As a result the trust will have the option of distributing up to £20,000 to each member if it goes with eIsland.

EIsland is hoping to appeal to the rank and file membership of the trust who must be balloted on its proposal and the Valentia offer. The group will also target the estimated 30 per cent of the membership who are no longer employees of Eircom.