New detail has emerged on how Denis O'Brien put together the consortium which beat bigger competitors for the second mobile licence. The picture of big business in operation is far from the usual sanitised version the public is given, writes Colm Keena.
The Moriarty tribunal's inquiry into whether Michael Lowry interfered with the awarding of the State's second mobile phone licence is putting into the public domain new detail on how Denis O'Brien put together the consortium which beat some of the biggest multinational telecommunications companies in the world.
Apart altogether from the issue of the integrity of the licence competition, the seven-day opening statement read out by tribunal counsel Mr John Coughlan SC has painted a picture of an extremely determined entrepreneur trying to keep his shareholding in his rapidly expanding businesses while at the same time sourcing the money he needs to pay for his increasing capital requirements.
The picture of big business in operation is far from the usual sanitised version the public is given and probably more accurately reflects the norm when so much is at stake.
O'Brien's initial break in business came by way of a state licence. He won the competition for a licence when the radio sector was being opened up to competition, and set up a successful radio station, 98FM. In time he opened stations in Prague and Stockholm. He also got involved in some successful property deals.
In the 1990s technology changes and pressure from the European Commission were leading to the opening up of the telecoms market throughout the EU. O'Brien set up Esat Telecom and began to compete against Telecom Éireann in the fixed land line business.
Competitions for mobile phone licences were taking place across the continent and the major international telecommunications companies were involved in fiercely fought competitions for the lucrative awards.
O'Brien knew the opening of the Irish mobile phone sector was coming and began to make preparations in early 1994. Sources told him that the licence competitions were hard fought and often dirty so when he set up an operations room in early 1995 in a building on Lombard Street in Dublin he arranged for blacked-out windows, 24-hour security and regular sweeping of the room for bugs.
Because Esat was such a small fish in a competition likely to involve the world's major players, O'Brien decided his only chance for success was if his bid was exceptional. Key issues in any business plan, he decided, would be the speed of the roll-out of the new company's coverage and the market share it could aspire to. He got planning permissions for masts around the State, using different company names for each application so that his competitors would not see what he was up to.
A key issue for O'Brien was to get a major player on board as his partner. John Callaghan, a director of Esat Telecom from December 1994 and of Esat Digifone from June 1995, has given a statement to the tribunal in which he said his first involvement in seeking a partner for Esat was in April 1995, when he travelled to Paris for a meeting with France Telecom.
According to Callaghan, O'Brien had already been in discussions with Deutsche Telecom and then, subsequently, with Southwestern Bell. He did not know why the relationship with Deutsche Telecom had fallen through but the relationship with Southwestern Bell had fallen through because of frustration on O'Brien's part in early 1995.
The meeting in Paris was attended by O'Brien, Callaghan, Massimo Prelz and Leslie Buckley, all of Esat. France Telecom was worried about a 50/50 ownership breakdown and the idea arose of 20 per cent of the Digifone consortium being given to Irish institutional investors.
Callaghan rang the senior Dublin stockbroker Kyran McLaughlin of Davy Stockbrokers from the France Telecom offices and was told by McLaughlin that the 20 per cent could be placed with Irish institutions in the right circumstances. The Irish group left Paris pleased with the progress which had been made.
What happened next, Callaghan said, was that PA Consulting was engaged to assist the Esat preparations and expressed the view that France Telecom would not be a great partner. It was a large company but did not have a great record in relation to the mobile phone market, PA said.
PA said Esat would be better off with a Nordic company and suggested the Norwegian company Telenor, then state-owned. Contact was made with the Norwegians in April 1995 and agreement quickly reached. A joint venture agreement for the Esat Digifone bid was signed between Telenor and Communicorp on June 2nd, 1995. Communicorp was O'Brien's holding company and owned his radio and telecommunications interests. The deal between Telenor and Communicorp envisaged 20 per cent of the consortium being placed with Irish investors, the idea which first arose during the meeting in Paris.
Telenor was a highly successful £1 billion company which had a track record of successful involvement in international telecoms. It was impressed by O'Brien but had concerns about Communicorp's ability to fund its share of the Digifone start-up costs should the bid be successful. It asked for a financial guarantee that Communicorp had available to it £5 million plus its share of the licence fee (the size of which had yet to be decided but could be anything between £5 million to £20 million or more). Telenor never got that guarantee.
While Denis O'Brien was working hard to find a partner and get the financial backing for his bid for the prized second mobile phone licence, he was also trying to grow his land-line business, Esat Telecom, as well as his radio stations.
His ambitions were bigger than his bank balance. "In the summer of 1995, Denis O'Brien's companies were stretched for cash," according to John Coughlan SC. The need for cash meant that those who had cash to offer were in a position to seek substantial benefits in return.
Massimo Prelz was on the board of Communicorp as a representative of Advent International, an international venture capital concern which had put $10 million into Communicorp in 1994 in return for a 25 per cent shareholding.
In May 1995 O'Brien and Prelz discussed a new $5 million convertible loan from Advent to Communicorp but the Advent board declined to approve it. At a Communicorp board meeting on June 15th, 1995, agreement was reached on a bridging facility from Advent to Communicorp. The sum involved was £3.2 million and the rate charged was a crippling 30 per cent. O'Brien, who loaned the company £600,000, insisted on a similar rate of return for his contribution. This sort of hardball attitude on Advent's part may have subsequently worked against it.
Negotiations were going on at this time relating to Advent becoming involved as an institutional investor in Digifone. Advent was to take on 5 per cent of Digifone, if it won the licence. In return Advent was to give a comfort letter supporting Communicorp's ability to meet its financial commitments regarding the start-up costs of Digifone. Agreement on the deal was reached on July 12th, 1995.
The comfort letter from Advent to Communicorp would have to satisfy Telenor. A note from John Callaghan at the time said the letter would have to be a "strong letter but cannot be a commitment to invest" in the Digifone project. The amount involved would be up to £30 million and in return for the money Advent would get an increased shareholding in Communicorp.
The July 12th agreement, therefore, meant Advent was to be involved in Digifone via its direct holding of 5 per cent, and at one remove via its ownership of a significant, though not controlling, shareholding in Communicorp.
Bids for the second mobile phone licence had to be submitted to the Department of Transport, Energy and Communications by Friday, August 4th, 1995. On August 2nd, 1995 Knut Haga, of Telenor, sent a fax to O'Brien expressing concerns about the comfort letter from Advent pledging financial support to Communicorp. He had received a letter from Peter O'Donoghue, of Communicorp, stating that Advent had committed up to $30 million to Communicorp if Digifone won the licence. When he'd checked this with Helen Stroud, a lawyer in London acting for Advent, she'd told him no such agreement existed.
"If this information is correct I believe we may have serious problems related to establishing an acceptable level of financial comfort. Please be aware of the fact that this situation may jeopardise the whole project."
O'Donoghue got onto Prelz on August 3rd trying to get a stronger letter from Advent. He wanted the letter by August 4th. He took a note of the conversation. The note reads, in part: "He will not sign the letter. There will be no new letter. Letter would require investment committee approval. DOB and POD misleading Telenor - playing with words - there is no offer, no terms agreed. Word 'committed' was misleading."
The discussion over financial backing continued on August 4th, the closing date for the bids. In a letter to Amund Bugge of Telenor on that date, Communicorp said it was trying to get an alternative source of funds as the terms of Advent's offer were unfavourable. Communicorp was asking for time.
Bugge got onto Gerry Halpenny, of William Fry solicitors, seeking an Advent offer which was legally binding. Halpenny, who was acting for Digifone, later sent a letter to Communicorp in which he pointed out that his partner, Owen O'Connell (who was working for Communicorp) was of the view that as the Advent letter was not satisfactory to Telenor, the agreement signed with Advent on July 1995 had no further effect. This would become important. The 1995 deal involved Advent supplying a letter of comfort which was satisfactory to Telenor and the fact that the letter was not satisfactory would, in time, give Communicorp an opportunity to walk away from the deal.
Despite all these difficulties over the soundness of the financial backing in place for Communicorp, the Esat Digifone bid was one of six submitted for the licence on August 4th. In its bid it said Digifone was owned 50/50 by Communicorp and Telenor, and that if the licence was awarded to it, 20 per cent would be placed with Irish investors by way of Davy. The investors would be: AIB; Investment Bank of Ireland; Standard Life Ireland; and Advent International. It envisaged that a total of £52 million would be needed to get Digifone up and running.
In relation to Advent, the bid stated: "In addition to its current investment of £12 million in Communicorp, Advent has offered up to a further £30 million to fund Communicorp's equity participation in Esat Digifone. The sum exceeds Communicorp's share of the licence fee and equity commitment."
Six days later O'Brien went to see a Glasgow Celtic match with Dermot Desmond. According to both men it was during this trip that they first discussed Desmond getting involved in Digifone. O'Brien told Desmond that Digifone had made a good bid for the licence but he was uncomfortable about the funding issue and specifically the fact that there were no binding commitments from the financial institutions.
Desmond then made an offer to O'Brien. He said he would underwrite the institutional 20 per cent in its entirety. (The opportunity to replace the institutions existed because, as they had not irrevocably committed to fund the project, O'Brien was not irrevocably committed to them.)
The offer from Desmond, according to both men, was the basis on which subsequent negotiations between Desmond and O'Brien took place, negotiations which led to Desmond not only replacing the four institutions named in the August 4th bid, but also to his underwriting O'Brien's entire financial responsibilities for the Digifone project. Advent was on its way out.
