Avoiding a nightmare scenario on broadband

Business Opinion: The chairman of Eircom, Pierre Danon, will shortly be knocking on the door of Minister for Communications Eamon Ryan, trying to interest him in a deal over broadband.

The details have to be finalised, but the big picture has been sketched out. Eircom will split its business into a network operator and a retail arm. The Eircom network will then be combined with the Government-owned broadband network and together they will build a next-generation telecommunications network for the island of Ireland and everybody will be happy.

Babcock & Brown, the Australian private-equity firm that owns Eircom, are happy because they will be able to sell off the retail arm and return money, lots of it, to their investors. The Government will be happy because it gets a next-generation network built and the rest of us are happy because we get quicker, better, cheaper telecommunications.

It sounds too good to be true and of course it is. That said, the Minister would do well to give Danon a hearing. The current situation, whereby Eircom and the Government in effect compete to provide wholesale broadband in urban areas, has a questionable logic to it. Whilst competition is generally a good thing, there is a strong argument that a country of Ireland's size cannot support two competing fixed networks as well as the various mobile networks. No one, for example, would make a case for constructing a second electricity distribution system.

The real issue is whether a deal can be done that reflects the lessons that the Government has learnt about private equity and Eircom in particular since it floated off the State phone company in 1999.

The nightmare scenario for the Government would be to enter into some sort of deal with Babcock & Brown involving the merger of the two networks only to see the Government-funded network sold on, refinanced or subjected to some other form of financial engineering to turn a few dollars for Babcock & Brown.

And it would be foolish to underestimate the Australian firm's appetite for such deals. Only last week it emerged that they have come up with some fiendish plan to sell off and lease back Eircom's mobile phone mast network.

A simple sale of the Government network to Babcock & Brown - which is understood to be the Australians' preferred option - really has to be ruled out on this basis. Having spent millions on the Metropolitan Area Networks to achieve some leverage over the telecoms industry, it would be foolish in the extreme for the Government to let things revert back to the situation that prevailed after the taking private of Eircom in 2000. This left the backbone of the national telecommunications network - a vital piece of national infrastructure - to the tender mercies of the Valentia consortium. The consequences of that decision - which the Government could have blocked or impeded - are still being felt.

It is probably unfair to single out Babcock & Brown as they are - in the words of the well-known advertisement - only doing "exactly what it says on the tin". No one in this day and age can claim to be shocked to see a private-equity firm wring money out of a company it has bought.

But if the Government is to seriously consider getting into a joint venture with Babcock & Brown, they must be realistic about who they are dealing with and what are their objectives.

Babcock & Brown may be making some comforting noises about infrastructural funds and long-term investment, but fundamentally they did not come half way round the world to buy Eircom to give Ireland a world-class telecommunications system.

They came to make as much money as they can as easily as they can. If that involves investing in the network that's fine, but if it doesn't then, so much the better.

Convincing the Government to trust Babcock & Brown is Danon's job. He has a number of feathers in his cap in this regard, the most significant of which is the opening up of Eircom's broadband network to other operators, something that the previous management effectively stonewalled.

Much will also hinge on the value put on the Government network as that will have a direct bearing on the leverage it will have in any joint venture.

Without a doubt, some sort of deal can be struck. The measures put in place to facilitate the sale of Aer Lingus are a recent example and they seem to have withstood their first real test: the hostile approach from Ryanair.

The inhabitants of the West may take a different view of how well the measures are working given the Government's decision so far to to wash its hands of Aer Lingus's decision to abandon the Shannon to Heathrow route rather than use its shareholding to try and influence the company.

But the Shannon issue is really one of whether or not the Government chooses to exercise its power, rather than one of impotence. And that is the position that they must be in if they are going to get into bed with Babcock & Brown.