Government Asked To Intervene As Eircom Battle Hangs In The Balance

by Jason Gorringe, Tax-News.com, London

14 August 2001

Sir Anthony O'Reilly's Valentia consortium remains the favourite to win the hotly contested Eircom takeover battle with a recommended bid of 3 billion euros (£1.84 billion) at 1.365 euros per share as the 13,000 members of the Eircom Employee Share Ownership Trust are balloted on their preference between Valentia and rival consortium eIsland, led by Denis O'Brien.

If the ESOT votes for Valentia as expected that will make 53% of the shares committted for Sir Anthony, and the board's support for his bid will become final.

However, there are many in Ireland who don't want to see either bidder succeed - both bids are highly leveraged and could be called opportunistic. Commentators are increasingly pointing to the fact that Eircom is more than just a business, it is owner of the vast bulk of the Republic's telecommunications infrastructure and set to remain so for the foreseeable future. The company is heavily regulated and must meet various minimum standards, including universal coverage, which are a legacy of its past as a State-owned monopoly.

Eircom, they say, is a strongly profitable, debt free business with a public listing and a diverse shareholder base. It is about to become a private company controlled by small number of individuals who will have borrowed 2 billion euros to buy it and who will need to generate a return of 20% a year on the borrowed money.

Whence will come the money for future investment in this vital part of Ireland's technological infrastructure, they ask? And, financial resources aside, based on past form neither bidder is likely to be an objective, 'hands-off' owner.

Pressure is mounting on the Government to do something to ensure Eircom's future - but what? Its only involvement at present is the need for Charlie McCreevy, the Minister for Finance, to change some minor tax laws to allow the the Esot to change the terms of the trust under which it was formed three years ago to allow the telco's staff to participate in the flotation of the group.

The ESOT will get around 450 million euros for its existing stake and will be invited to buy 29.9 per cent of 'new Eircom' for roughly E200 million. EIsland proposes the surplus of 250 million euros is repaid to beneficiaries via a tax efficient mechanism involving loan notes, while Valentia envisions that it will be re-invested in preference shares with a coupon of 11.5%. Valentia argue that the preference shares are not all that different from the eIsland loan notes, but for ESOT members to be able to sell them Valentia will first have to obtain a listing for them.

Mr McCreevy has previously indicated that he will not stand in the way of either bidder. One of the US venture capitalists involved in the takeover battle has privately admitted to amazement at the Government's lack of interest, but at present it seems that it will stick to its policy of non-involvement.

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