Thursday 18 April 2019

STORY OF THE WEEK : Higher charges for phone users are on the line in telecoms sale

Ailish O'Hora

AS they say in the business, "there's a lot of tidying up being done around here". That was the message coming out of Eircom's mobile subsidiary Meteor yesterday - a reference to preparations to sell off a division.

The news that Babcock & Brown, the owner of Eircom, is preparing to sell off its retail division, with or without its mobile arm Meteor, so soon after buying it has surprised many in the telecoms market.

Having said that, if you look at the figures, the decision may be easier to understand. Babcock has done very well out of Eircom in the past year and the sale of the retail arm could net the firm up to €1.8bn.

The company has only owned the telecoms asset for a year but in that period the net debt on Eircom's balance sheet has risen from €1.8bn to €4.2bn.

While most of that debt is in the form of borrowings that financed the deal, earlier this year the new owners refinanced €425m of equity through a new expensive debt instrument called a payment-in-kind (Pik) note, saddling the company with more debt.

This frees up a huge amount of capital for Babcock and Brown Capital which bought Eircom last year for €2.4bn.

Earlier this year the company told investors that it was actively extracting cash from the former incumbent to fund its own aggressive acquisition strategies.

The company, which is also 35pc owned by staff and former workers through the Employee Share Ownership Trust (ESOT), has also been selling off property. At the end of last year Quinlan Private and Eircom agreed a sale and leaseback agreement for Eircom's new headquarters near Heuston Station in Dublin.

The deal is worth over €190m and at the time the telecoms firm said it was reinvesting the cash in the business.

It is also currently working on a sale and leaseback deal for its network management centre at Citywest in a deal that is expected to be worth €40m.

Babcock also recently announced a hike in line rental - at a time when we already had the highest line rental charges in Europe.

"We have the highest line rental charges in the world," said one telecoms source. "This (line rental charges) is supporting an inefficient organisation in a weakly regulated market but the Government has supported this.

Although Babcock has already been sounding out the market abroad in a bid to find a potential buyer, sources close to the company say the new owner is likely to be a private equity firm.

It is understood the Government has already been briefed by Babcock/Eircom executives on plans to strip out the retail arm and sell it off.

The sale of any Eircom division will be a sensitive political issue. The company has had five owners since 1999.

In addition, about 450,000 Irish punters piled into Eircom when it was floated back in 1999, but many were stung when the bubble burst the following year when billions were wiped off the value of telecoms and technology firms around the globe.

As part of its plans, Babcock intends to retain the lucrative wholesale division which owns the telephone network around the country.

Telecoms sources said yesterday that Babcock didn't transfer the 3G licence it is spending over €100m on to its mobile arm Meteor when it was acquired last year because it is likely to merge it into the wholesale business in the future.

If and when the deal goes through, the Irish telephone network would be a privately owned monopoly with Babcock essentially controlling what it charges competitors to use it.

This will not be good for consumers, telecoms sources said yesterday.

"This is like a step backwards when you look how long it took competition to take effect in the Irish telecoms market," said one.

Tommy Broughan, the Labour spokesperson on communications, said the whole thing is mind-boggling. "We're in for another major sale of the old state telephone network."

It is understood that one of the reasons the company was so keen to settle with Eircom union members over the recent pay dispute was the that sale was scheduled to be finalised by the end of the year.

The company agreed this week to pay a 2pc increase due under the national agreement, Towards 2016, while the unions have agreed to enter into structured talks on the management's plans for reform at Eircom at an operational level.

Steven Fitzpatrick, general secretary at the Communications Workers Union (CWU), which represents workers at Eircom, said yesterday the company was playing a dangerous game by not consulting with them at any stage.

"We have at no stage been approached by the company over this," he said.

"We have influence on the Government, through our social partners, and would also be willing to influence board members." (referring to the Eircom board of directors which includes union representatives.)

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