Eircom's "Break-Up and Sell" Plan Cools

The future of Ireland's fixed-line telco, eircom, is once again under the spotlight as its plan to sell off parts of its business becomes less certain. Ireland's Sunday Business Post reported yesterday (20 April) that eircom has effectively abandoned any immediate plans to split into two companies and sell its retail and mobile businesses. Citing an unnamed eircom source, the paper reports that the slowdown in credit markets, economic uncertainty, and a lack of clarity on the regulatory regime has prompted the former state company to take this proposal off the table in discussions with the Irish government and the regulator, ComReg. "If the markets changed and the environment changed it could still be done," the source said. "But it is not on the cards for at least two to three years."

Under its original plan outlined in July 2007, eircom had hoped to pursue structural separation of its business, breaking it up and selling off the fixed retail customer base plus its mobile unit Meteor. In return for the government and ComReg's support for the idea, eircom pledged to invest about 500 million euro (US$792.3 million) laying new fibre-optic, high-speed broadband cables around the country; however, that is all set to change. The Sunday Business Post and the Irish Independent both report that eircom submitted a new proposal to ComReg in recent weeks calling for functional separation rather than structural separation. The new plan still involves the break-up of the business but unlike the previous plan, the retail unit will remain part of eircom and the company will offer equal access to the fixed network to its retail unit and rivals. It will also be in line with calls from the European Union and will follow examples by BT in the United Kingdom, TeliaSonera in Sweden, and Telecom Italia in Italy (see Ireland: 6 December 2007: Uncertainty over Future of Babcock & Brown's eircom Stake and 20 July 2007: Private Equity Owners Mull Sale of eircom's Retail Unit—Reports).

Outlook and Implications

• Private-Equity Baggage: The uncertainties surrounding eircom highlight the unique business environment which comes with private-equity involvement in the telecoms industry. Babcock & Brown (B&B), the Australian private-equity group which took a 57% stake in eircom in 2006 has not hidden its preference to quickly derive value from its acquisition. Soon after the takeover deal, the company put eircom's masts up for sale, raising 155 million in September 2007. However, that has not done much for its gearing levels. Eircom still has debts of 4.1 billion euro and the mooted sale of the fixed retail unit and Meteor were meant to help pay off the debt. In fact, in January 2008, the Irish Independent reported that Hutchison Whampoa's 3 Ireland was interested in buying Meteor. Nevertheless, B&B's biggest headache is the current global economic upheaval which has all but dried out private-equity investment for large-scale buyouts. Accordingly, any intention by B&B to make a quick sale of eircom, or any of its units, is no fait accompli (see Ireland: 14 January 2008: 3 Ireland Eyes Rival Meteor, Babcock & Brown Set to Break up eircom, 11 December 2006: New Owners Mull Sale of Eircom's Mast Sites and 18 April 2006: ESOP Teams Up with Babcock & Brown in US$2.9 bil. Bid for eircom).

• A New Era: As the uncertainty over whether to go along with structural separation or settle for functional separation continues, another row is brewing over eircom's reluctance to fund the roll-out of the new fibre-based network. The Irish Independent reports that eircom may have issued the Irish government with something approaching an ultimatum to either fund the network roll-out or watch as Ireland's plans for fibre network crumbles, with 3 Ireland calling it blackmail. For Ireland, which has one of the lowest broadband penetrations in Western Europe, such an outlook nullifies the government's efforts to boost rollout of broadband services. However, the Sunday Business Post reports that the government is less subservient to eircom as the growing use of mobile and wireless broadband in the country has created a new era where eircom's broadband network is no longer the only entry point for broadband access. Pointedly, in the emerging mobile broadband domain, eircom is lagging behind its rivals Vodafone, O2, and 3 Ireland who all have an established mobile broadband product in the market. Indeed, eircom faces the double investment dilemma of rolling out a fibre network and a 3G mobile network; funding the former will hardly give it any competitive advantage in the market, but not funding the latter will set it back ages compared to its rivals.

Find out more about Same-day Analysis