The Eircom employee share ownership trust (Esot) is exploring the possibility of increasing its 21.5 per cent stake in the former State telco after a €2.36 billion takeover led by the Australian investment fund Babcock & Brown, according to informed sources.
The sources believe the Esot would like to bring its stake in the company close to the 30 per cent level it held after Sir Anthony O'Reilly's Valentia consortium took the company private in 2002. Under the valuation mooted by the Australians, the purchase of an additional 8.5 per cent stake in the company would cost some €200.6 million.
It is unclear at present how the Esot would fund such a purchase, an issue that will be central to the deliberations of the trust and its 12,000 members.
It is considered unlikely that Babcock & Brown would be opposed in principle to the notion of the Esot taking a greater stake in the takeover vehicle. That would remove a potential obstacle if a structure satisfactory to the Australians could be developed. However, the dialogue between the two sides is thought not to have reached that point yet.
The Esot chairman, Con Scanlon, and spokespeople for the trust, did not return calls last evening. A due diligence exercise, embracing a detailed examination of the telco's books and presentations by key executives in Eircom's individual business units, has been under way for a fortnight. No surprises have emerged so far but a formal bid from the Australians and the Esot is not expected for some weeks yet.
Any move to increase the Esot's stake would be in line with its manoeuvres at the time of the Valentia transaction, when Sir Anthony's consortium prevailed over a rival bid from Esat founder Denis O'Brien. Then, the Esot doubled its stake to 30 per cent as its price for supporting the Valentia proposal.
The trust's stake was reduced to 21.5 per cent when Eircom was floated for a second time in 2004.
Not only would a move to increase the trust's stake protect its position after the change of ownership that is now increasingly likely, but it would also put the Esot's members in line for a higher share of the company's dividends.
Crucial here is the fact that the Esot's tax-efficient structure must wind down within three years. With Esot members facing greater exposure to tax on the their investment in the medium-term, the trust may choose to lessen that blow by taking a higher stake in Eircom in order to provide members with a greater share of the overall income from the company.
Such issues, too, will be central to any advanced debate on a funding mechanism.
Under the original approach to Eircom from the Australians and the Esot, the trust's stake was to hold steady at 21.5 per cent.
This was to be achieved by putting the Esot's preference shares, worth €140-€180 million, into the bidding vehicle. In place of these, the Esot was to receive ordinary shares commanding 21.5 per cent of the bidding vehicle.
At the same time, the Esot was to exchange its €507 million worth of ordinary shares - comprising its current 21.5 per cent stake in Eircom - for preference shares guaranteed by Babcock & Brown's banks. Such guarantees meant the deal would carry no risk for Esot, while the overall structure would minimise its tax bill.
