Eircom’s high valuation likely to be the main reason for pulled IPO

Last Friday, Eircom surprised by announcing that it had decided not to proceed with an initial public offer "at this time", following a six-month-long strategic review.

It was a surprise because only a couple of weeks earlier, an updated IPO prospectus had been filed with the Central Bank of Ireland.

In reality, the IPO option was a fall-back position. My understanding is that the preferred option, pursued throughout the summer, was for a trade or financial sale, which would have given a cleaner exit for Eircom’s equity holders.

Why wasn’t Eircom able to execute a so-called liquidity event when the Irish economic recovery story is so hot and international investors are almost queuing up to put their money to work here?

Valuation was the chief reason. Eircom’s owners reputedly valued the business as high as €3.5 billion during the review process. They might have lowered their expectations when the sale didn’t materialise, but it seems that they still expected a value of more than €3 billion from an IPO.

Better future price

Potential institutional investors simply baulked at this valuation, and its owners decided to sit tight for now in the hope of getting a better price down the track.

In spite of what Eircom says about there being “encouraging signs of positive momentum in the business”, the company is still loss-making and faces enormous challenges in what is a fiercely competitive market. Its revenue dropped by 8 per cent to €1.28 billion in the financial year ended June 30th, while its losses widened by 184 per cent to €333 million. Even if you exclude the €200 million charge for staff exits, the loss was higher than in the fiscal year 2013.

In the quarter to the end of June, fixed line revenue was down 8 per cent at €238 million and mobile was 3 per cent lower at €84 million. And while Eircom has successfully transitioned its mobile customer base from pre-pay to contract customers, its average revenue per user still declined in both categories and by 2.7 per cent in total.

It was a similar story for its retail fixed-line voice and broadband, where revenues declined by a blended 2.3 per cent year on year. What now for Eircom?

Management, led by chief executive Herb Hribar, have to prove the growth story over the next year or two before trying to go again.

Eircom’s decision to pull back on this occasion must be particularly tough for the senior executives, as €35 million had been set aside in the past two financial years for them to share under the terms of a management incentive plan.

“The directors currently expect the vesting conditions in respect of a sale event are most likely to be fulfilled within the next financial year,” its bondholder document filed on August 29th stated.

In other words, they expected a sale to happen by the end of June 2015, when the current financial year ends.

Executives stay in trenches

Having expended so much time and energy this year on trying to get a deal across the line, you have to wonder how enthusiastic Hribar, who is 62, and chief financial officer

Richard Moat

, who is 59, are for another year or two in the trenches.

The likelihood is that the momentum Eircom talks about won’t materialise until the heavy lifting on its €400 million-plus investment in fibre is completed by the end of 2016. That’s when the free cash should begin to flow and institutional investors or potential private equity buyers might be convinced that Eircom is worth a punt. Either that or its owners will have to lower the price.