Valentia Telecommunications's $2.4 billion (€2.7 billion) debt for the Eircom takeover has been given an investment grade rating by Standard & Poor's although the international rating agency has warned that Valentia will need to deliver on its business plan and improve its cash flow relative to its debt.

It is understood that Valentia now has acceptances for over 88 per cent of Eircom shares.

The offer has been left open until November 2nd as two conditions remain to be fulfilled - the approval of the Minister for Enterprise, Trade and Eemployment and approval from the Office of the Director of Telecommunications Regulation.

S&P says Valentia's investment grade rating is driven by Eircom's high quality earnings.

But it also adds that despite the quality of Eircom's earnings "Valentia's financial risk is weaker than is typical for its ratings" and that to protect its ratings it will need to deliver on its business plan and improve its cash flow relative to its debt.

The S&P ratings report is very similar to an earlier report from Moody's and warns that there is very limited headroom for financial underperformance against Valentia's business plan.

S&P says Valentia's strategy will focus on the development of the core business, measures to turn around lossmaking businesses and to mitigate market share erosion.

In addition, the plan will focus on cost reduction, a reduction in capital expenditure to European benchmark levels and strict cash flow management.

"If executed in accordance with the business plan, these measures should enable the company to improve its debt protection measures, offsetting further market share contraction and tariff declines," says the S&P report.

In Valentia's favour is the high cost of entry into the Irish market for competitors given the capital intensity of the fixed line market, the scope of the Eircom network and its well-established brand. S&P adds that the low level of penetration of fixed line business in Ireland relative to most European countries suggests that there is significant potential for volume growth in business and residential fixed line voice and data services.

However, S&P also identifies risk factors, notably the highly leveraged nature of the deal where there is a debt to capital ratio of 70 per cent. "This is considered aggressive for the rating."

Valentia's debt to earnings before interest, taxation, debt and amortisation, or EBITDA, ratio of 4.06 times at end-2001 is also seen as aggressive by the ratings agency.

Another risk factor identified by S&P is Eircoms's comparative inefficiency against its European peers as measured by lines per employee.

The agency warns that improved efficiency through workforce reductions may be complicated by the strong unionisation in Eircom and the Employee Share Ownership Trust's 29.9 per cent equity stake and 25 per cent voting interest in the company.