Eir, which was forced to seek court protection from creditors in 2012 after years of being treated as a glorified ATM by a succession of owners, will be left with one of the highest debt burdens among European phone groups as two US hedge fund investors plot a massive payday.
It emerged on Tuesday that Eir plans to raise additional debt and dip into its cash pile to pay New York-based Anchorage Capital and Davidson Kempner, who own 35.5 per cent of Eir between them, a €300 million dividend.
It would be the second cash return to both firms in a little over a year, after they took an estimated €280 million off the table last March by selling on a 20 per cent stake as two French firms controlled by tycoon Xavier Niel bought 64.5 per cent of the business.
Anchorage and Davidson Kempner had mopped up most of their holdings on the cheap in the six years after Eir’s 2012 examinership – a massive restructuring where 40 per cent of its €4.1 billion debt pile was written off. The borrowings had driven in no small part by a series of private-equity and financial owners leveraging the business up to fund hundreds of millions of euro of special dividends.
The latest move will involve Eir taking on an additional €250 million of additional borrowings and pushing the total towards €2.5 billion. About €100 million of this will be repaid in the short term by free cash being generated by the business.
Still, it would leave Eir with debt level of 4.1 times its earnings before interest, tax, depreciation and amortisation (ebitda). That's at the upper end of the range for European telecoms groups, and more than double the leverage ratios of the likes of BT Group, Swisscom and Telekom Austria.
Cash generation
Eir is said to be confident that its improved cash generation since last March – as Niel oversaw a series of cost-cutting measures and simplification of its product offering – will quickly move its debt ratio down to between 3.5-4 times ebitda.
However, it will remain much higher than the ratio of 2.3 times attached to Niel's Paris-listed Iliad, which owns 31.6 per cent of Eir and has an option to increase this to 59 per cent in 2024 by buying most of stock owned by the Frenchman's investment vehicle NJJ.
NJJ executives said in December 2017 as the latest change of control – the seventh in less than two decades – was announced that NJJ and Iliad planned to make a return from Eir “through dividends and not refinancing”, as the company went “back to basics”.
Niel’s NJJ and Iliad, in fairness, are not taking part in the windfall dividend payments. But the trouble is, Eir continues to have two financial investors holding more than a third of the company.
While analysts reckon that Eir is generally on course to lower its debt burden in the next few years as earnings grow amid stabilising revenues and the company having a lower cost base, there’s a risk the hedge funds may press for further refinancings in future to fund cash dividends.
