EIRCOM is certain to be taken over by its lenders after its owners shunned a second deadline to make an offer to stay in control of the business.
ST Telemedia, Eircom's Singapore-based majority owner, and the Eircom employee shareholder trust failed to table an offer for the company after an extended deadline to submit bids passed last night.
It means there will now be a straight fight between two sets of lenders for control of Ireland's most important privately owned infrastructure business.
The news is a major blow to government hopes of seeing a revived Eircom play a major role in new infrastructure projects.
Both of the lender groups are dominated by global hedge funds and investment banks, with little direct experience of running a telecoms business.
Neither of the two remaining bidders is willing to put any new money into the company.
Eircom has a cash pile of €400m, and both sets of lenders claim that cancelling around €1bn of the company's debt will be just as effective as investing fresh cash, in terms of helping a turnaround.
Eircom's own managers, however, are convinced of the need for fresh investment to help turn the business around.
Last night, ST Telemedia blamed the crisis in the eurozone for the decision to walk away.
"Owing to the continuing macro-economic uncertainty in the eurozone, ST Telemedia has not submitted a proposal on December 2. We continue to monitor and evaluate our investment position, and remain in discussion with the company and the First Lien Co-ordinating Committee."
ST Telemedia bought a majority stake in Eircom for just €30m two years ago, but the deal left the company saddled with an unsustainable €3.7bn debt burden built up by its previous owner.
Eircom is now certain to go through a "debt for equity" swap that leaves a lender in charge, possibly through an examinership early next year.
It could be good news for Eircom's management. Lender sources say Paul Donovan's team could remain in place and is even likely to be offered a slice of the company for co-operating with which ever set of hedge funds takes over. Now the lenders will fight it out between themselves for control of Eircom.
Both lender groups want to take ownership of the company in exchange for cancelling debt, but disagree over how much of Eircom's €3.7bn debt needs to be slashed to put the firm back on a sound financial footing.
Eircom has four layers of corporate debt. Holders of the top layer have the best secured loans, meaning they are most likely to be repaid, while the bottom layer is the most risky.
The fight for control is between holders of the two top-ranked layers of the debt. The best secured lenders are owed €2.6bn and the next layer down is owed €350m. Both are offering to cancel some debt in exchange for control of Eircom.
If the lower-ranked lenders gain control, they still have to repay all €2.6bn of more senior debt, but can write off debt owed to lenders lower down the rankings.
If the top lenders get control, they will wipe out all other lenders, but can still demand that the bulk of their own loans are repaid by Eircom over time.
The top-ranked lenders have the best chance of success, but if holders of the €350m slice of loans can prove that Eircom is worth more than €2.6bn they could be considered "in the money" by a court.
That should entitle them to take over the business, as long as they can repay the rest of the loans.