Threat of regulation may dampen investor enthusiasm for Eircom, writes Jamie Smyth, Technology Reporter
Eircom's return to the Irish Stock Exchange after a brief three-year hiatus will create a clutch of millionaires among its management as a result of one of the most spectacular business deals in Irish corporate history. But the pay off for Eircom's new, largely institutional shareholders, will be a much more sober affair, reflecting a return to the kind of business fundamentals that have been absent since Eircom was sold by the State.
To lure big institutional investors, Eircom is offering a fat dividend payment equivalent to half its free cash flow. This should amount to €81 million in the year to end March 2005, reflecting its positioning as a solid utility play for investors.
Certainly, the firm's ability to retain 80 per cent market share in the five years since telecommunications liberalisation is very impressive. There are also relatively few well-resourced rivals capable of stealing market share.
But investing in Eircom is not without risks and experts remain divided in their assessment of the threat posed by potential Government or regulatory intervention.
The furore caused by Eircom's third rise in line rental charges in a year in February provoked outrage from Opposition politicians and prompted intervention by the Minister for Communications, Mr Ahern.
Eircom has been forced to outline to investors that the Government is considering putting its €130 million annual contracts with Eircom out to tender to promote competition in the market.
There are signs that the Minister for Communciations may also be serious about giving the Commission for Communications Regulation (ComReg) adequate powers to enfore regulation.
Until now ComReg has sought to enforce its decisions against Eircom with the threat of a €3,000 fine, a penalty that held few fears for a billion euro firm.
In its prospectus Eircom documents a string of regulatory reviews initiated by Comreg that could hurt its future revenues.
One crucial decision regarding the wholesale charges that other firms will have to pay Eircom to use its local access network is due a week after the flotation. A new system that will enable rival operators to offer residential customers a single bill is also due to be implemented in April. Indeed, many observers believe Valentia has chosen the optimum time to sell out as things can only get worse for Eircom in the future.
Eircom's high debt levels will undermine the firm's flexibility in embracing new technologies. And its mobile conundrum is likely to cause Eircom's new shareholders a few headaches.
A strong trend towards mobile telephony has already been established in the Irish market, in part driven by its young population. And in its prospectus Eircom identifies its strong brand, customer base and sales network as reasons for its interest in re-entering that market.
But Meteor's $200 million (€164.1 million) price tag is too expensive for a debt-laden post-IPO Eircom, a fact that effectively eliminates the firm's quickest and least complicated entry into mobile.
The alternative of trying to cobble together a so-called "virtual mobile operator" with another mobile firm may prove cheaper in the short-term but could take too long to organise and stymie its potential growth.
Establishing a joint venture with new entrant mobile operator Hutchison, which has had problems in the British market remains a possibility. But even a rapid entry into mobile comes with no guarantee of success for an incumbent that sold all its mobile expertise and talent to Vodafone just three years ago.
British Telecom's poor performance since returning to the mobile market in Britain last year illustrates that success is not guaranteed even the strongest of incumbent operators. Clearly, questions and risks remain over Eircom's mobile phone strategy.
With this absence, Eircom has highlighted broadband as its growth story for the flotation. But adding DSL subscribers is no guarantee of growth and could merely substitute existing data revenues attained through dial-up internet rather than boost Eircom's top line revenue growth.
Investors will be cheered by Valentia's proven track record of cutting costs to generate additional cash flow and will hope that the co-operation of trade unions and staff will continue. Despite reducing its workforce from 13,121 in the year to end March 2001 to 8,387 by December 2003 there are still substantial cost savings to be squeezed out of Eircom.
The prospectus notes that Eircom plans to reduce its headcount to 7,000 by 2008, a move that will cut its ongoing operating costs in return for a once-off charge of about €140 million.
Capital investment has also been substantially reduced under Valentia's management coming in slightly below the €200 million annual target which it set when buying Eircom three years ago.
Eircom's management has told ComReg that any efficiency gains achieved by Eircom should flow back to the company in increased profits. Over recent years regulation has not been able to translate these efficiency gains into cheaper access for competitors.
New institutional investors in Eircom will hope that moves to give ComReg more power will not spoil their party. But there is little chance they will enjoy a payout on the scale of Valentia's
