Future of Eircom's owner is on the line as vultures come calling
::: Story of the Week
For Australian investment fund Babcock & Brown Capital (BCM), the last year has been the toughest of its short life. What's more the life expectancy of Eircom's majority owner appears to be declining at a rapid rate.
This week, the latest salvo in what has drifted between open and phony warfare was fired by an Isle of Man registered and AIM-listed investment fund, LIT, that has made a non-binding indicative proposal to acquire BCM.
It's almost certainly a feint designed to prompt BCM into quickly redistributing cash on its books to shareholders and hurriedly finalising a deal with its parent, Babcock & Brown (which also owns 8pc of Eircom), to buy back a lucrative management contract.
BCM has effectively dismissed LIT's posturing. But LIT, which is controlled by UK activist fund Laxey Partners, might not sit back and be ignored.
For Eircom staff, the prospect, however slim at the moment, of a new owner must almost be cause for amusement.
Babcock & Brown Capital paid €2.6bn to buy Eircom in 2006, having previously been acquired, taken private, and then floated again on the stock market by a consortium that included Independent News & Media chief executive Sir Anthony O'Reilly.
With BCM's share price languishing around AUS$2, Eircom could now conceivably find itself with a new landlord arriving through the back door.
BCM's market capitalisation is now just AUS$336m (€174.4m), while KPMG earlier this year placed an equity valuation on Eircom (one of BCM's just two investments) at somewhere in the region of AUS$604m (€314m) and AUS$928m (€483m).
Someone, somewhere thinks the sums simply don't add up and that could herald a fight for BCM. It's not the first time that BCM has been faced with an open shareholder revolt. In November last year it got a scathing letter in the post. It was from a London-based hedge fund, Pendvest, which is a minority affiliate of Capvest, -- an investment firm established by Cavan-born financier Seamus Fitzpatrick.
Having accumulated over 5pc in BCM, which owns 57pc of Eircom, Pendvest was spoiling for a fight.
It lambasted BCM as an "inefficient investment vehicle" and demanded the return to shareholders of about half the Australian firm's then AUS$445m cash pile.
It demanded that a special meeting be held to discuss alternative strategies for the Australian fund's primary assets, Eircom and the Israel-based Golden Pages. Pendvest also threatened to make moves to have BCM wound up unless it made some progress.
BCM was rattled.
Within a week, BCM said that the spare cash on its books would be "formally allocated to pursue specific identified investments". It placated Pendvest, but it was the first round in what would be a bruising 12 months for the Australian firm.
At the time, BCM's share price was hovering around the AUS$4.45 mark -- way off the AUS$11 that some analysts believed it should have been trading at.
In April, BCM said that it had set aside up to 50pc of its outstanding capital to buy back shares, in a move that would prop up the price and hopefully keep shareholders appeased.
But worse was to come.
As the credit markets quickly unravelled, BCM's share price, along with that of its parent, Babcock & Brown, tanked. By June, Babcock & Brown was fighting a rearguard action to assure investors that its banks wouldn't seek early repayment of debt.
Strategy
But the Australian firm's strategy of highly leveraged acquisitions was coming apart at the seams.
Sweeping board changes ensued, while BCM's share price has continued to tumble -- only shored up this week by LIT's sabre rattling.
BCM has consistently stated that Eircom isn't up for sale. But everything, of course, has its price. Any potential buyer who wanted to take the company over via a more traditional route of paying BCM for the entity, is faced with the prospect of owning a company that, while cash generative, is still saddled with over €4.2bn in debt.
Watching from the sidelines is Eircom's employee share-ownership trust, which owns 35pc of the telco. It's undoubtedly been examining its options, but will probably wait until at least BCM's AGM has been held later this month to determine what moves it could make to protect its interests.
Another monkey on Eircom's back is ComReg, the country's telecoms regulator. It isn't too impressed with the level of investment in Eircom's network and has been trying, much to the delight of consumer groups, to force down wholesale line rental costs.
Such a move could see Eircom's already dwindling landline business further diminished. Eircom has a number of surplus property assets that might have helped to marginally reduce its debt levels, but, in the current climate, buyers might be thin on the ground. Even if they are willing to pony up, they'd undoubtedly drive a hard bargain.
Eircom and BCM had also been hoping that the former state-owned telco would be able to separate its retail and network businesses -- a piece of filleting that could have generated significant additional value for BCM shareholders. But that plan is firmly on ice.
Meteor, long a has-been in the mobile race, has come up trumps for Eircom, which owns the operation. With over one million subscribers, it's the shining light in Eircom's portfolio. But with success comes adversity. In a report to bondholders this week, BCM noted that Meteor is increasingly competing with Vodafone and O2 as it encroaches on their traditional turf.
That ups the ante for Meteor, and makes it a more difficult job to generate the type of growth it has experienced particularly during the past year or so.
Meanwhile, BCM has been changing the guard at Eircom. When executive chairman Pierre Danon jumped ship earlier this year, speculation was rife that an Irish appointee would be sought to fill his shoes.
Healing
This week, former Glanbia boss Ned Sullivan was named as non-executive chairman. BCM is probably hoping that his safe pair of hands will also be healing ones.
Eircom's relationship with the Government hasn't been an easy one of late. The company had offered a national network upgrade with the Government getting a slice of the action, if the State stumped up around €300m towards the cost. The proposal was snubbed.
While BCM will most likely survive the latest attack on its structure, it's unlikely to be the last. The woeful performance of its share price has left it wide open to vultures. LIT may ultimately be pacified, but BCM will have plenty of battles ahead.
- John Mulligan
