[Sunday Times] Regulator key to Eircom break-up bid

damien

http://www.timesonline.co.uk/article/0,,2095-2035915,00.html

BABCOCK & Brown Capital is understood to be sounding out the telecom regulator, ComReg, on its proposal to split Eircom before it makes a full-scale bid for the Irish telecom company. The fund, operated by the Australian investment firm Babcock & Brown, last week called upon shareholders to stump up the second A$2.50 (€1.54) instalment per partly paid share, taking cash raised in the market to A$1 billion (€617m).

It spent A$350m on building up a 10.8% holding last year, while its parent forked out A$55m for a further 1.7% stake — taking the total to 12.5%. Sources said that Babcock & Brown has also been talking to banks about funding a bid. The fund set out in its prospectus, issued in late 2004, that it may raise debt to make investments.

It is believed that Babcock & Brown initially met the Eircom employee share ownership plan’s (Esop) advisers, ABN Amro Rothschild, before Christmas. ABN Amro refused to comment. Contact has been stepped up in recent weeks, sources say, though it has not yet been in touch with Esop’s trustees or Eircom itself about its plans. Striking a deal with Esop, which holds 22% of Eircom, would be key to any deal going through. However, a cash offer would trigger tax liabilities.

It is understood that Babcock & Brown has indicated to ABN Amro Rothschild that it would be aiming to divide the group into its wholesale networks and retail operations. “It would be fairly easy to (raise debt against) the networks business, as this is heavily regulated and future cash flow is fairly visible,” said a Dublin analyst.

However, Babcock & Brown will need regulatory approval for splitting the business. Under its current regulation, Eircom’s return is capped at 11% of the value of the network. Sources say the investment house may also seek an increase in the valuation of Eircom’s network, which could lead to higher telecom prices.

It is believed Babcock & Brown has been canvassing private equity houses for potential interest in Eircom, but any investors will be keen to get assurances on regulatory approval. Some say it would be difficult for the group to bring a private equity house on board. “Private equity is mainly interested in companies where potential for cost cutting and other efficiencies are evident. That trick was played when venture capitalists (Valentia) took it private in 2001,” said one analyst.

While Eircom’s stock gained as much as 12% last week as takeover speculation went into overdrive (it ended the week up just over 5%), shares in Babcock & Brown Capital edged slightly lower.

“The initial investment by Babcock & Brown Capital into Eircom was far from positively received by the market here, due to the recent performance of the incumbent telecom operator in Australia (Telstra),” said a Sydney-based analyst, on the basis of anonymity. “This also led to a derating in the parent company.”

Babcock & Brown’s stock has slid by 8% since news of the investment last October.

paulm17781

If all of that is true, and they do plan to split the company, if they buy it, would you think it would be a good thing?

It sounds like it would but I am not used to Eircon being good whole sale comapny.

damien

Many people would be happy with the split but it's how it gets done in the main issue. Many would be suspicious of being told in advance of such a move in case it was done to keep the masses happy so the deal isn't soured like the Swisscom one. But then many are too paranoid.

kaizersoze

However, Babcock & Brown will need regulatory approval for splitting the business. Under its current regulation, Eircom’s return is capped at 11% of the value of the network. Sources say the investment house may also seek an increase in the valuation of Eircom’s network, which could lead to higher telecom prices.

Thats the bit I don't like about the plan.

lucernarian

Agree with Kaizersoze. This sounds very suspicious. And does this 11% restriction thing mean that eircom can only take profit depending on the value of the phone network?? What about depreciation etc.?

Sarsfield

To_be_confirmed wrote:

Agree with Kaizersoze. This sounds very suspicious. And does this 11% restriction thing mean that eircom can only take profit depending on the value of the phone network?? What about depreciation etc.?

I guess the theory goes that to counter asset depreciation there has to be asset investment. This increases the quality of the service as well as the value of the network. The 11% is worth more to Eircom but the customer gets a better product as a result.

That's the theory.

The next theory is that if the network gets split from the retail business the current cross subsidy that eircom gets away with (higher line rental against lower call costs) won't be possible any more. This should result in a more level playing field for all the telcos.

That's the other theory.

Practice is never as simple.

lucernarian

Sarsfield wrote:

I guess the theory goes that to counter asset depreciation there has to be asset investment. This increases the quality of the service as well as the value of the network. The 11% is worth more to Eircom but the customer gets a better product as a result.

On that note, I suspect that eircom are being a bit too genorous with the depreciation figures. Someone told me 3 years back that eircom would depreciate their assets until they had no monetary value at the rate they were going at. This guy had read the AGM report.

That was probably an exaggeration but I do know that the poles eircom use, for example have an economic life of 15 years, so their latest AGM report said. There are a significant amount of poles out there that were put up by the P&T so eircom seem to be up to some suspect practices.

Back on topic, I think it would be a disaster for the country if another group of venture capitalists grabbed hold of eircom again. The company's assets have been pilfered enough as it is.

damien

Where's O'Reilly investor Denis O'Brien now to buy the company or did I just answer my own question?

watty

Wooden "telegraph" poles have a life of up to 100 years. ESB gets about 75 years out of very similar poles with heavier cable on them.

Obviously if you rate them at 15 years it makes TE look worth much less as most now would need replaced!

lucernarian

watty wrote:

Wooden "telegraph" poles have a life of up to 100 years. ESB gets about 75 years out of very similar poles with heavier cable on them.

Obviously if you rate them at 15 years it makes TE look worth much less as most now would need replaced!

That's what's so strange. Eircom know that the amount of years these assets are used for are much longer than what the books say they should. Methinks eircom have a smaller tax bill if there is more depreciation listed as expenses.

dam099

To_be_confirmed wrote:

That's what's so strange. Eircom know that the amount of years these assets are used for are much longer than what the books say they should. Methinks eircom have a smaller tax bill if there is more depreciation listed as expenses.

Depreciation is added back for tax purposes and capital allowances based on Revenue rules are then deducted so it would not reduce their tax bill.