Thursday 17 October 2019

The Interview: 'If we were Google or Facebook, there would be a statue up to our investors' - Eir Chief

As debate rages over the National Broadband Plan, Eir chief Carolan Lennon vows its investors are in it for the long-haul and have committed €1bn to Irish infrastructure, writes Adrian Weckler

In charge: Carolan Lennon, CEO of Eir. Photo: Steve Humphreys
In charge: Carolan Lennon, CEO of Eir. Photo: Steve Humphreys
Adrian Weckler

Adrian Weckler

Adrian Weckler [AW]: Among all the talk of value for money and whether the National Broadband Plan is worth a €3bn subsidy, Eir will take in close to €1bn from rental of its poles by the bidder. That's a nice pay day for Eir, surely?

Carolan Lennon [CL]: I don't believe it is a great pay day. I accept that €1bn is a lot of money. But I think you have to look at how that is made up. Our prices are regulated. So the pole and duct prices are set by the regulator. And we're allowed to make just over an 8pc return on those. It costs €600 for a pole. There are 1.2 million poles in the intervention area. And over the course of this project, maybe every one of those poles will have to be replaced.

To give you an example, we had to replace 2,500 poles after Storm Ophelia recently. So there's a lot of money that goes into maintaining that network.

Currently, we have customers on our copper network in the intervention area, so the money that we get from them pays for the maintenance of that infrastructure.

But in the future, we won't have them because you have to believe that they will migrate onto the new fibre network that's being built by NBI [National Broadband Ireland, the name of the company set up by Granahan McCourt to act as the official corporate entity that rolls out the rural network]. So we won't have that revenue coming in. And we'll still have to maintain that network because NBI's fibre will be hanging on it.

So the reality is, when you do the sums from an Eir point of view, the revenue that we're going to lose from those copper customers migrating over the lifetime of this project is almost equivalent to the money that we're going to get from renting out our ducts and poles.

Xavier Niel, head of Eir owner Iliad. Photo: Bloomberg
Xavier Niel, head of Eir owner Iliad. Photo: Bloomberg

 

AW: But 8pc income over the next three decades is still a pretty good return. Did a calculation that this might be forthcoming influence your decision to withdraw from the National Broadband Plan, which might have been a lot more hassle?

CL: Well they [the NBP bidder] had a choice. There is other infrastructure they could use from other suppliers. The ESB has infrastructure. They have decided to use Eir's infrastructure but they had a choice.

But I led our NBP programme. My background was the wholesale business [before becoming CEO]. We were absolutely determined to win this. I used to get teased because I wanted to win both lots [when it was two contracts].

I thought we were the best people to do it. We had the infrastructure, we know how to build in rural Ireland. For us to win that network competition would have given us the chance to upgrade our copper network in rural areas, to hold on to revenue from rural customers and to expand our wholesale offerings.

We were really excited to participate in that. But as the process went on, layer after layer of complexity got built into the process. This was particularly so for us as an ex-incumbent and a big wholesaler.

For example, there was a requirement that our wholesale business couldn't sell in the intervention footprint and that we'd have to set up another wholesale function.

There were other things, such as the requirement that the SLA [service level agreement] for this rural network would have to be better than the SLA that exists in urban areas in terms of how quickly we repair a fault when something goes down.

So there was a risk for us that we'd agree to something in the intervention area and then suddenly it'd overhang the rest of your business on the cost.

When we started adding all those things up, there was no business case in the end for Eir to participate in the NBP. For me, it was a very sad day when our [then] CEO wrote a letter to say we were pulling out.

I felt very disappointed because I felt we could win and do a good job in delivering it.

But having made that decision, we now have new shareholders on board who are long-term telco people.

We've been able to make decisions about where we're going to spend our capital, make our own plans, and get on with delivering those. We'll be finished our 300,000 rural rollouts at the end of June. And then our national fibre build starts in July. So we're not hampered or tied up into complicated processes.

And it's great, to be frank, to be paddling our own canoe and getting on with the things that we want to do.

Of course, we'll support NBI and they will be using our infrastructure. And the revenue we lose from the copper customers migrating [to NBP fibre], we will get back on pole rental.

But we still need those people to maintain the poles and to do all that we've a thousand people working on our network and looking after it.

 

AW: What about alternative NBP solutions put forward by some, such as 5G?

CL: I think 5G can be a solution for some people. It's not, in my opinion, the answer to the National Broadband Plan. Because with 5G there will always be gaps. And the whole idea of the National Broadband Plan is not to have gaps.

 

AW: Are you surprised that the cost of the National Broadband Plan is what it has turned out to be, escalating from an initial estimate of €500m seven years ago to a €5bn network today with up to €2.6bn of state subsidy? Or do you think that roughly reflects what it actually costs to build that sort of fibre-to-the-home infrastructure to over half a million rural premises?

CL: €500m was never realistic. So to say it's gone up is not right. That €500m figure was an initial number that just went out, it wasn't cost-based. So to say it was ever really €500m is wrong. Am I surprised at the cost? No, I'm not. Very few other countries have said they'll roll out to 100pc of premises, they've often said 98pc or 97pc.

I know the department is doing this for the right reasons, that the ambition is for 100pc coverage. And if this goes ahead with fibre to the home, that would put Ireland at number one by a long shot and very hard to hard to catch.

But you'll find it's that last 5pc, those 50,000 to 100,000 homes, that are going to drive an awful lot of the cost. I think that's the debate.

To me, that's a political decision, a societal call. Is that kind of money worth it so that people can live and work where they want? It's not an economic call and it's not a business case. You have to take in the bigger picture about what kind of society we want and how that all works.

 

AW: What about take-up levels? There has been some suggestion that there is little demand for this level of high-speed fibre. In particular, critics point to take-up levels of 20pc in areas that have recently seen the rollout of such fibre broadband. Is that a low take-up level or is it decent?

CL: Definitely decent. You build networks for life, not for Christmas. These networks have to sustain us into the long-term. And households in rural Ireland that won't want broadband today will want it in 20 years or 10 years or five years. Whether because of a change of household or whatever.

So do I believe that for Eir having a fibre-to-the-home network across the majority of our homes in the future will give us a sustainable position where we can be very competitive and cross urban? Absolutely, I do. And I want to have it before people want it.

So we're very, very happy with the uptake on our fibre-to-the-home network. It's well within our business case recommendations. And we've also found that of the take-up of homes we released in the first quarter, their uptake rate is now considerably ahead of the average. It builds. We're very happy with it.

 

AW: Were you surprised to hear Taoiseach Leo Varadkar say that the Government considered nationalising Eir as a National Broadband Plan option?

CL: Yes. That would have been a bit of a surprise. There have been a few TDs who have said that from time to time. Any time there's a heated discussion on the National Broadband Plan, that has been a line that comes out. 'Let the ESB do it' is another line that comes out.

If there's one thing that frustrates me about being CEO of Eir is that people often bring us back to privatisation [in 1999] and whether it was a good decision or a bad decision.

It was probably a bad decision, but it was a decision made by people way before me. And the team there in place today, the current investors and the current management team, are all about driving Eir forwards and have no say in the past. But it's just something that people tend to hanker back to.

 

AW: What about your own fibre plans? It's one thing for the State to be subsidising a fibre-to-the-home network in rural areas. But Eir badly needs a similar standard in cities and large towns, surely, if you're going to compete with Virgin's cable and Siro's fibre.

CL: Yes. When you look at us in the cities, we're under-indexing. Our network market share across the country is 68pc. But in the cities it's 40pc. We simply haven't done as well in urban areas. So we need to have a product that people really want in the cities. And you have [Virgin] cable built out in the cities with no competition from Eir because we weren't investing and that was previous shareholders who made those decisions.

Now we have an opportunity to address that and take back some share. Fibre to the home is, we believe, the future. Even if a gigabit isn't much use to most of us today, in the future that will definitely change.

The question for us is do we want to be building our network when it's changed? Or do we want to have our network built in advance so that we're ready for the change?

 

AW: With all the fibre we're now talking about, are we effectively looking at the end of the copper phone network in Ireland?

CL: Yes, pretty much. We will not need the copper lines that are going into houses. We know that copper limits us because with distance and quality. It's done its job. But we're regulated.

So we have started that process now to engage with the regulator and industry to ask what does a world without that copper network look like?

It also depends on how quickly people migrate off the copper network onto the onto the fibre network. I think in the future that would be good for Ireland to have the vast majority of customers served by an all-fibre network. You get a lot less faults.

Copper loves lightning and we get a lot of lightning in Ireland. Copper isn't great with water, either. We don't have as many of those challenges with fibre.

 

AW: Eir has just taken on €400m of new debt. The history of the company doing this in the past is well known and it worries people. Are we about re-enter a cycle of the company being over-leveraged, leading to challenges around capital investment and delivery of services?

CL: Absolutely not. Yes, we did go out into the markets to refinance some loans and bonds that we had. Since our NJJ acquisition, we've made an investment plan and are spending €1bn in capital. Those contracts have been signed. The fibre-to-the-home contract is signed and the mobile work has already started.

Since the [NJJ] acquisition, we've been able to take our net leverage down from 4.1 times ebitda to 3.7 times ebitda, even with that investment baked in. So we saw an opportunity to go to the market. And we were very well oversubscribed.

We got a much better rate than we have today and we were able to push out our time to repay by two years to 2026. All of which means we can get all our investment plans delivered and have seven years before we have to look at the balance sheet again.

Our plan for leverage is going to be three-and-a-half times to four. This will put us just above that level for the moment. But within 12 months, we'll be back in that three-and-a-half to four range.

But more generally, investors invest to make a return.

As long as you're investing the right amount in your infrastructure and you have a decent leverage percentage compared to other European telcos, then this is all absolutely fine.

I'd love the dialogue for Eir and investors and dividends to become the norm.

To be honest, that's a great result. For us to be able to go out and be as oversubscribed as we were, to get a better rate to extend it out by two years, I think shows a lot of confidence in Eir and in what we're doing. It's never picked up like that. But that's the reality of it.

 

AW: Well, if it's not picked up like that, presumably it's because this company is still one of Ireland's most essential utilities. Maybe people are less interested in whether Eir is making a handsome return for its investors than whether it's actually providing society with well-oiled, up-to-date infrastructure.

CL: I suppose so. But look what those investors are doing. They're committing one billion euros of their money to improve the telecoms infrastructure in Ireland. If we were Google or Facebook, there'd be a statue.

They [Xavier Niel and NJJ] picked Ireland. They've made those decisions and now we're doing those investments.

This has to be acknowledged. They could spend their money somewhere else. But they decided to spend it on fibre infrastructure in Ireland. And our previous investors, to be fair to them, decided to spend €250m of their own money on bringing fibre to rural Ireland.

When everyone else was just talking about it, we actually went and got on with it. So I think we've put our money where our mouth is. We take this risk. If no one goes on to that rural network, then it's my problem. As it happens, that's not the case, which is great. But it's still risk-return.

Our current investors have a long-term view and are going to hold Eir to perpetuity. They have faith in Eir and faith in Ireland which is why they're spending their money here.

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