Valentia may have delivered knockout blow with commitment by Comsource

It is probably unwise to write off Mr Denis O'Brien and eIsland at this stage but all the signs are that Valentia Telecommunications have landed a knockout blow in the battle for Eircom. JP Morgan and Investment Bank of Ireland will no doubt be running the numbers and looking at the fine print of Valentia's new offer but a counter offer from eIsland looks unlikely.

The obstacle is the commitment given by Comsource, which owns 35 per cent of Eircom, to accept Valentia's offer, even though it is only 0.5 of a cent more than eIsland's. Comsource has said it will only accept a counter offer if it exceeds €1.50 per share. A deal at that level, which would value Eircom at €3.3 billion, would appear to be too rich for the blood of the US venture capital firms backing both bidders. Warburg Pincus, one of the funds involved in Valentia, dropped out rather than participate in the €1.365 bid announced yesterday.

The deal struck between Comsource and Valentia would appear to be surprisingly favourable to Valentia. The Dutch Swedish joint venture has given Valentia an undertaking that all but assures it of victory in return for less than €4 million more than it would have got under the eIsland offer.

The agreement seems all the more surprising when you take into account that eIsland would almost certainly be prepared to top the €1.365 that Valentia has put on the table.

Comsource has taken the view that an offer of €1.365 from Valentia that will definitely succeed is more attractive than a higher higher bid from eIsland that might not fly.

A major factor in Comsource coming to this decision is the pressing need for cash by KPN, the larger of the two partners. KPN has debts of €23.2 billion and is keen to see the process come to a speedy end so that it can use the proceeds to pay back its banks.

Valentia's bid is seen as having a much higher chance of succeeding because it has tied in the Employee Share Ownership Trust (ESOT), which owns 14.9 per cent. Although both bidders have offered the ESOT the opportunity to increase its shareholding to 29.9 per cent, the trust would be legally tied into Valentia, while eIsland's deal is based on trust.

A deal that does not have the support of the ESOT has little chance of hitting the magic 80 per cent threshold for shareholder acceptances which allows it take full control. This ability to execute the deal is worth more than the extra five cents or so that eIsland might be prepared to bid at this stage, Valentia argues. Comsource must agree or else it would not have agreed to a irrevocable that renders an increase of less than 13.5 cents useless and thus short circuit the bidding battle.

EIsland offered to talk to the ESOT about a similar arrangement to that put in place by Valentia. But the offer, made on Thursday, appears to have been too late.

EIsland is expected to leave their offer open for the time being and seek to have talks with the ESOT and have its offer balloted on by its members. It may yet produce a surprise.

Shareholders need not feel to sorry for Denis O'Brien and, indeed, may have some reason to be grateful to the former Esat Telecom chairman. Mr O'Brien has an agreement with Eircom that, if he was outbid, he would receive a €16 million fee to cover the expenses of making his bid. Such arrangements are common in big takeovers and are called inducement fees.

It was money well spent by Eircom. Without eIsland there would have been no takeover battle and Valentia would not have paid anything like the €3 billion it will now have to part with for control of the Republic's telecommunications network and lines into the home of almost every adult.