Tuesday 20 February 2018

Eircom appears to be a lame duck -- but it still has potential suitors

John Mulligan and  Donal O'Donovan

IF you try to tease out where the financial value of Eircom lies at the moment, you'd be forgiven for perhaps coming up blank.

With crippling debt levels that current owners Singapore Technologies Telemedia (STT) and the Employee Share Ownership Trust (ESOT) are trying desperately to slash, coupled with declining revenue streams, Eircom appears to be a lame duck.

While its cost base is being cut, such moves only provide a temporary stay of execution if the business continues to suffer heavily from the battered economy.

But despite the obvious problems facing the company, international investors are now lining up for a battle royale for control of Ireland's telecoms incumbent, after it emerged that Denis O'Brien's Caribbean-based mobile operation Digicel has instructed its financial boffins to run the rule over the business.

Digicel generates substantial EBITDA but it's unclear what its bottom line profit is, so unless he's prepared to sink his own personal funds into Eircom, it's difficult to see how a Digicel approach for the Irish telco could be financially engineered.

Even if Mr O'Brien and Digicel were to succeed in wresting control, it would be sure to raise concerns among some policymakers about combining his already substantial media ownership with Eircom's media distribution network.

It's been speculated that STT and the ESOT would stump up about €300m in fresh equity for Eircom as part of a successful bond restructuring -- and most of it would be pumped into infrastructure development

Digicel has debts of $4.6bn (€3.3bn) and it's highly likely that existing lenders would baulk at any attempt to raise funds off the back of Digicel to pump into Eircom, while even Digicel's own financial headroom for doing so would be limited.

Earlier this year, ratings agency Fitch said that while leverage at the Digicel Group "remains high", it is expected to "gradually decline" in the medium term as earnings grow and indebtedness remains relatively stable. But the group also faces having to refinance $1.4bn of notes maturing in 2015, and Fitch notes that an inability to do so will "pressure liquidity".

So why would the former Irish state-owned company be any sort of a draw for Mr O'Brien? He failed to buy it once before, but returning to the kill now is certainly a questionable move, especially as the carcass has been stripped bare.

Digicel would have to engage with senior and other Eircom lenders who've already been foot-dragging as management, STT and the ESOT attempt to renegotiate the debt pile. Even the prospect of Eircom descending into an examinership process more than likely isn't off the cards yet if the current talks with lenders can't be advanced within a reasonable timeframe.

Whether Digicel would be able to provide any significantly enhanced options to the lenders, while at the same time ensuring an Eircom takeover would be a potentially profitable move, is certainly unclear. It will be up to Digicel's bean counters to see if they can make the sums work. It could be a Herculean task.

It's true that STT wouldn't be planning to stuff fresh funds into Eircom unless it foresees some sort of eventual revenue stabilisation and recovery at the Irish company. The difference is it's already a shareholder and has spent months negotiating with lenders, putting it, on the face of things at least, in a somewhat stronger position to push through its plan.

While Digicel senior management have an enviable track record in having developed the brand in the Caribbean, central America and Pacific islands, extrapolating that experience to Eircom would be an altogether tougher proposition.

As a mature mobile market, Ireland would be a very different challenge. Mobile operators -- including Eircom's Meteor unit -- here have been experiencing sharp revenue declines in the past few years as they cut prices and subscribers spend less. Eircom's fixed-line business has also been hit very hard. As such, growth has to come from broadband, and that requires significant investment.

The coming days could tell us if Digicel really has the stomach for a fight with STT and the ESOT, and whether it can persuade lenders that it can trump the pair's restructuring offer.

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