Captain didn't sink the ship
As Eircom was moved from owner to owner, Paul Donovan can't be held responsible for firm's wayward course
THIS week's Eircom examinership, by far the largest in Irish business history, brings Paul Donovan's tenure as chief executive to a disappointing conclusion.
The Eircom examinership hardly came as any surprise. Since the company was first privatised in 1999 it has changed hands no fewer than five times. The outcome of the examinership is almost certain to see yet another change of ownership as the current shareholders, STT of Singapore and the employee share ownership trust, are wiped out.
These repeated changes of ownership have left Eircom with a crippling debt burden. Eircom's barrister Maurice Collins told the High Court yesterday that the company had gross debts of €4.1bn. Eircom, he told the Court was "clearly insolvent".
It was all a far cry from the heady days of the summer of 1999 when Eircom made its Stock Exchange debut in what remains the largest Irish privatisation ever. Initially priced at €3.90, valuing the company at over €8bn, the shares briefly touched €5 in early trading.
It was all downhill from there. Less than a year after the flotation the internet share bubble burst. The Eircom share price collapsed leaving the more than 500,000 novice shareholders who had bought in the flotation nursing heavy losses.
In 2001, after first selling its mobile arm Eircell to Vodafone, Eircom was sold to the Valentia consortium in a deal which saw shareholders lose about 20pc of their investment. Three years later Valentia cashed in its chips by refloating Eircom on the Stock Exchange. Then in 2006 Eircom was taken private once more when Babcock & Brown and the Eircom Employee Share Ownership Trust (ESOT) paid €2.4bn for the company.
When Babcock & Brown went bust three years later, Eircom was put on the auction block again. This time STT of Singapore paid just €40m for a 65pc stake with the ESOT purchasing the remainder of the firm.
Every time that Eircom has changed hands the company has been loaded up with ever more debt. As Mr Justice Peter Kelly remarked in the High Court yesterday, Eircom was the subject of a "corporate game of pass-the-parcel" and that in this case "the parcel lost".
The turnover at the top of Eircom has been almost as rapid as the changes in its ownership. Alfie Kane, who had led Eircom through its first flotation, stepped down as chief executive after the Valentia takeover. His replacement Philip Nolan quit when Babcock & Brown took over and Rex Comb was appointed in his stead. Mr Comb lasted three years in the hot seat. Cathal Magee then served briefly as acting chief executive before Mr Donovan was appointed chief executive in July 2009.
Mr Donovan, who has said that he is leaving Eircom for "personal reasons" is to stay in the job until the end of this year. This means that he will have served three-and-a-half years as chief executive, slightly longer-than-average for post-privatisation Eircom bosses.
The soon-to leave Eircom boss can't be held responsible for the examinership. The debt mountain is a legacy of the repeated changes in ownership rather than Eircom's trading record. Despite all of its well-publicised difficulties, the company remains profitable.
For the six months to the end of December 2010, the last set of full results published by Eircom, the company recorded operating (pre-interest) profits of €116m on a turnover of €880m. However, the company has since warned investors that operating profits fell in 2011.
In an announcement on February 20 Eircom warned that its performance and earnings would be "significantly lower than originally anticipated" for the period out to June 2017.
While Mr Donovan can hardly be held responsible for the acquisition debt which its successive owners have saddled Eircom, this isn't the only problem which the company faces. Eircom, in common with most other fixed-line companies, has seen its traditional business model shredded by the rise of mobile telephony.
For many decades Eircom and its predecessors have installed a telephone connection into every new house built in this country. Traditionally the vast majority of these new connections, 98pc or more, translated into fixed-line telephone accounts three or six months later.
That began to change in the late 1990s. Very gradually at first, the proportion of new connections translating into fixed-line telephone accounts began to drop. By 2005 the proportion of homes with a fixed line had fallen to 86pc. Since then it has fallen even further with the latest CSO figures showing that just 70pc of all homes had a fixed-line in 2010.
With the Eircom results showing a continuing decline in the number of residential fixed lines, that percentage has almost certainly fallen even further in the past two years.
Most of us now make and receive most of our telephone calls using a mobile rather than a fixed-line phone -- 60pc of all voice telephony now by mobile. In response, the traditional fixed-line telecommunications companies such as Eircom have been forced to rely increasingly on data traffic, ie broadband.
However, even in broadband the mobile phone companies are nipping at Eircom's heels with mobile broadband. In order to compete Eircom must offer its customers ever-faster broadband speeds. This means that it will have to upgrade its network, a process which is going to cost a lot of money.
Unfortunately its huge debts mean that most of Eircom's cash flow is earmarked to pay interest rather than for desperately-needed investment -- in the second half of 2010 Eircom's total capital expenditure amounted to a mere €83m. When one considers that Eircom proposes to invest up to €1.3bn in next-generation fibre optic broadband infrastructure over the next five years, the need for a lightening of its debt burden becomes clear.
Last year STT and the ESOT proposed to inject up to €300m of fresh equity into Eircom. This proposal was rejected by the lenders. Then, in December, citing the uncertainty caused by the eurozone financial crisis, STT pulled its representatives off the Eircom board -- effectively walked away from the company.
Further complicating matters is that the Eircom lenders are not a homogeneous group but are split into three different, competing groups. The Eircom first lien lenders are owed a total of €2.7bn. These have first charge on the group's assets and are in the strongest position. Eircom's second lien lenders are owed €350m while its payment-in-kind and floating rate noteholders are owed a further €1bn.
The examinership effectively involves the first lien lenders seizing control of the company. These will take a 15pc "haircut" on their loans in return for 98.5pc of the Eircom's equity. The second lien lenders will receive €35m, a 1.5pc stake and a 90pc haircut, while the noteholders will be completely wiped out.
This would leave Eircom with total gross debts of €2.3bn. While this would represent a 42.5pc write-down of its existing debt, will it be enough to allow it invest the money, €1.3bn, in the broadband infrastructure it needs to compete with aggressive competitors such as UPC?
Far more likely is that Eircom's new owners would have to budget on repaying a further chunk of its borrowings before its balance sheet was sufficiently robust to undertake the investment it so desperately requires.
As he clears his desk Mr Donovan will at least have the consolation of knowing that it will be his successor and not he who will have to deal with these issues.