KPN and Telia, the owners of 35 per cent of Eircom, are seeking to exit the company as part of the deal that will see Vodafone buy its mobile business for €5.1 billion. It is understood that the Dutch and Swedish telecoms companies do not want to remain as shareholders in Eircom after the demerger of Eircell, the mobile business.
Attempts to facilitate KPN and Telia - who have the power to block the deal - are one of the main reasons the sale has been delayed, according to sources close to the negotiations. The transaction was to have been announced last week but is not now expected until next week. Providing KPN and Telia with an exit mechanism will be difficult due to the structure of the deal. Vodafone is to pay for Eircell with its own shares which will be passed on directly to Eircom shareholders.
It is expected shareholders will get one Vodafone share for every two Eircom shares they currently hold. There is no cash element to the deal and Eircom would need to find money from some other source to buy out KPN and Telia's stakes in the rump business. Once Eircell is stripped out, the other businesses of Eircom - fixed line and multimedia - are valued at more than €3 billion. Sources close to the deal say it may not be possible to find a way to allow KPN and Telia to sell out. Mr Denis O'Brien, the former Esat Telecom chairman, has tabled a €2.25 billion offer for the fixed-line business. The board of Eircom has yet to seriously consider his approach and are not expected to do so until the Eircell transaction is complete.
There are also unconfirmed reports Dr Tony O'Reilly, the chairman of Independent News & Media and Waterford Wedgwood, is putting a consortium together to bid for the non-mobile assets. Energis, the British telecoms company that together with Viridian owns Nevadatelecom has also been suggested as a bidder. It is understood that Eircom management and board would be keen to see KPN and Telia exit as part of the Vodafone deal. The two companies made it clear earlier this year that they did not see their shareholding in the Irish group as strategic and were looking to sell. The knowledge that 35 per cent of the company was on the market became one of the main factors holding back Eircom's share price. KPN has planned to sell its 21 per cent stake in the autumn but the plans were postponed once talks began with Vodafone.
Telia had agreed not to try to sell its shares until next spring. Eircom management are keen to avoid a similar problem following the demerger.
Comsource, as the two companies are known, bought their stake in the then State owned Telecom Eireann in 1996 as part of a strategic alliance. KPN owns 21 per cent of the group while Telia owns 14 per cent.
They initially took a 20 per cent stake with the option to increase their stake to 35 per cent. The option was exercised in the run-up to the flotation of Eircom in June last year. The effective price of KPN and Telia's shares was around €2.50 and they were facing losses if they disposed of them prior to the appearance of Vodafone as a buyer for Eircell which has triggered a revival in the share price.
The Vodafone deal is expected to be announced next week along with the company's interim results. Davy Stockbrokers forecast the company will report a fall in profits for the first six months, from €160 million to €147 million, due to once-off costs associated with shedding jobs. Turnover is expected to have increased from €931 million to €1.01 billion due almost entirely to revenue growth at Eircell. Aggressive price cutting has eaten into fixed line revenues, according to the brokers.
