Venture capitalists' renewed interest lifts prospect of telecoms

The prospect of several consortia of financial interests doing battle for the rump of Eircom is a clear signal that venture capitalists and private equity funds are starting to look again at telecoms as potentially lucrative investments.

Their re-emergence - the consortium chaired by Sir Anthony O'Reilly is backed by private equity household names such as Mr George Soros, Providence Equity, Warburg Pincus and Goldman Sachs - indicates that they believe telecoms assets are undervalued on the stock market. Private equity investors in Europe and the US are understood to have earmarked unprecedented sums to buy up established telecommunications companies whose share prices have tumbled amid the flight from technology stocks.

Up to $100 billion (€112 billion), according to one industry estimate, has been raised by private equity specialists, either specifically for opportunistic bids or as part of general funds that are actively pursuing deals in the telecoms industry.

A number of recent deals have raised hopes that financial buyers may begin to target stronger telecom and technology companies, and help establish a floor under some share prices.

The entry of the consortium led by Warburg Pincus, Soros Equity Partners and Providence - three of the largest specialists in this area - into the Eircom bidding arena is good news for Eircom shareholders. On Monday, the consortium confirmed it was planning a bid for Eircom worth at least €2.6 billion (£2 billion). Goldman Sachs plans to invest a smaller sum from its private equity fund into the vehicle chaired by Sir Anthony.

The four are said to have access to private equity funds totalling $36 billion. Meanwhile, British Telecommunications has been approached by at least two groups of private equity bidders interested in buying Yell, its Yellow Pages subsidiary, for up to £3 billion sterling (€4.8 billion).

Most of these buyers specialise in so-called "value" investments, which target traditional industries with relatively low growth prospects but solid cashflow.

Nevertheless, many telecoms operators previously in public hands, such as Eircom, have seen their share prices fall to levels where they begin to share the same characteristics as other utilities. A handful of more established alternative operators with strong earnings or net cash are thought attractive to financial buyers.

This latest wave of private investment, dubbed "vulture capital", is in contrast to the pattern of venture capital investment that accompanied last year's Internet boom.

"The most attractive telecom operators today are often in highly regulated markets with huge barriers to entry and increasingly less competition from newer start-ups," said Mr Christian Oberbeck at Saratoga Partners, a US private equity specialist that is already active in the telecoms industry.