Irish telecoms company eircom is once again on the block and its controlling shareholder, eircom Holdings Ltd (ERC), is hoping to find a buyer for the heavily leveraged company by the end of the month.
Eircom Holdings, formerly Babcock & Brown Capital (BCM), issued its March 2009 operational update last week, which showed eircom’s debt standing at €3.4bn. The bulk of this debt will become payable from September 2014. The update went on to state that eircom’s debt was non-recourse to ERC; whose assets include a majority stake of 57% in eircom as well as 100% of Israeli company Golden Pages.
The fact that eircom’s debt is non-recourse to ERC will come as good news to any potential bidder, as a bid for eircom would most probably involve an acquisition at the holding company level. According to analysts, such a bid would be likely to value ERC at about A$175m, which is ERC’s current market cap and effectively values the eircom assets at zero. According to data from Thomson Reuters, BCM bought eircom at the height of the M&A boom in 2006 for €1.7bn excluding liabilities.
While it might seem that any successful bidder for ERC would be getting a bargain in eircom, the looming debt repayment is likely to cause concern.
However, Robert Jaeger, a high-yield analyst at SG says: “There’s five years before the bonds mature, a lot can happen in that time so there is some opportunity for value creation.”
There may indeed be some opportunity to grow the business when markets pick up again, but eircom faces stiff competition and difficult economic conditions in Ireland. Also, a successful bid would need the support of bondholders and, some sources suggest, concessions from the Irish Government on eircom’s growing pension obligations.
The operational update said that eircom had embarked on reducing costs, having reached agreement with employee unions on a restructuring plan that it hoped would achieve savings of €130m a year by June 2011. Other features of the restructuring include a headcount reduction of 1,200 employees and freezing pay increases until June 2011.
Press sources suggest there are three potential bidders for ERC, including private equity form CVC Capital, Arcapita, and Singapore Technologies Telemedia. A bid from former BCM management was recently made through the Taemasbridge bid vehicle, but the offer was subsequently rejected by the current management.
If no successful buyer is found for ERC by the June 30 deadline, the company has said it will revert to a “Plan B”, which would involve a restructuring of ERC’s interests in eircom.
ERC owns 57.1% of eircom and employees own 35% of the company through an employees share ownership trust (ESOT).