A Partner at Last
A strategic partner has been found for Telecom Eireann. At long last. The Government has chosen KPN/Telia, a Dutch and Swedish consortium. The deal looks good - on the surface and it may prove to be highly beneficial to all the parties involved, but the Government had little no choice.
The deal provides for an initial payment of £183 million by the consortium in exchange for a 20 per cent stake and another £200 million over the next three years as the shareholding is brought up to 35 per cent. KPN/Telia is expected to make further payments later, depending on how Telecom has grown in value the total proceeds may top £500 million. This staggered payment arrangement suits both sides. Telecom didn't want all the purchase price straight away because it will get more when the company's value increases; it suits KPN/Telia because it is not flush with cash at the moment.
Given the penetration of the Irish market which Telecom now enjoys, the money isn't huge, but Opposition politicians are wrong to dismiss the price as "scandalous". The money might have been higher if there had been more bidders, but lengthy delays (some unavoidable, some not) meant there was only two to talk to, with KPN/Telia the strong favourite.
This time last year Cable & Wireless, BT, Bell, Atlantic and GTE were all interested, but then the US government announced a total deregulation of its telecommunications industry. All of a sudden, there were numerous US alliance and acquisition possibilities to examine instead.
The money being paid by KPN/Telia will do nothing for the Exchequer in the short term. Over a period of three years KPN/Telia must pay £383 million and then - if Telecom's value has increased sufficiently - perhaps another £100 million plus. But the Government must put £220 million into Telecom as part of the deal. This will help to reduce the company's debts and make it better able to afford annual capital expenditure of some £180 million. The remainder of the KPN/Telia purchase price, perhaps £280 million, may seem substantial, but it is far less than the amount owed by the Government to Telecom's pension funds. Indirectly, of course, the Exchequer benefits from the price that is paid because if a deal had not been done it would have had to meet the pension liability in full - as well as contribute to Telecom's investment needs or else watch the company wither away.
The Department of Communications and the Telecom chairman, Mr Ron Bolger, had suggested that Telecom didn't have to do a deal if the right investor didn't come along; that there could be life without a strategic partner. Technically speaking, this is correct. But without a strategic partner Telecom would have had to shoulder alone the huge cost of research, development and equipment upgrading. In addition, its hopes of low cost access to a global network would be much reduced.
The Minister for Communications, Mr Lowry, is right to describe the deal as "a milestone". It gives the company an enormous opportunity to strengthen itself greatly ahead of the total competition that deregulation will bring. Telecom needs to lower its costs, reduce its charges further, widen significantly the products and services it offers and fully develop the potential of its subsidiaries - Cablelink being a good example. Of one thing Telecom can be certain, it will never have this opportunity again.