It’s a move that would pave the way for a sale of the retail arm, and one that has caught the eye of other carriers around the world, who perceive it be a useful way of extracting value from existing operations.
In the case of Babcock & Brown, the company wants to be in a position to generate a decent return from Eircom’s assets, having fully acquired the company in 2006. It had paid about €250m for a 12.5% stake in 2005. The following year it tabled a successful bid for the entire company, that valued Eircom at over €2.4bn.
It was still the days of cheap money, and Babcock & Brown borrowed heavily to pay for the deal – 20% of its offer was funded from equity, 80% through debt. At the time, Eircom had debt totalling €1.8bn – not something to take on likely in such a relatively small operation on an international scale.
Those debt levels continued to soar as Babcock & Brown refinanced existing borrowings and took on more. Within weeks of the acquisition, debt levels had risen to over €4bn. That’s a far cry from the position the telco was in prior to 2001, when its debt levels were negligible. When it was acquired by the Valentia consortium that included Independent News & Media’s Tony O’Reilly, debt climbed to €2.5bn – a figure that had fallen marginally to €2.1bn by the time it was sold again.
Chopping Eircom to pieces is how Babcock & Brown now obviously envisages making a return. During the summer it emerged that the company had also put its phone transmission masts up for sale, with a price tag in the region of €150m.
If Babcock & Brown was to sell Eircom’s retail arm, it could fetch as much as €1bn, while the mobile operator Meteor could be worth €800m.
Analysts are beginning to see much merit in the move.
This week Credit Suisse analyst Andrew Butterell substantially raised his 12-month price target for Babcock & Brown by more than 50% above its current trading price, to A$7.59. But he thinks the best could be yet to come.
Butterell says that if Eircom is successfully split, Babcock & Brown shares could be worth A$11.50 – almost two-and-a-half times their A$4.75 closing price on Friday 2 November.
Eircom chief executive Rex Comb thinks the chances of regulator Comreg and the government allowing Babcock & Brown to split the company is “50-50”, but he may be overly conservative in his odds.
The government’s Department of Communications, Energy & Natural Resources has said that Eircom is a private company and “how it organises itself on a corporate basis is primarily a matter for the company itself”. However, there may be regulatory issues that could prevent the proposal going through as smoothly as Babcock & Brown would hope for.
The question now is, who’ll come out of the woodwork to buy the retail units if Babcock & Brown puts them on the block? The fallout from the credit squeeze continues to hammer the markets. Anything that comes with the baggage of a big debt pile may find itself short of suitors. It will all come down to pricing, but Babcock & Brown will be forced to drive a hard bargain if it’s to get the sort of return it will need to please shareholders.
http://www.independent.ie/business/irish/eircom-seeks-approval-to-split-company-in-two-1116112.html
http://www.irelandoffline.org/2002/04/02/ibec-calls-for-eircom-split/
http://archives.tcm.ie/businesspost/2006/03/19/story12661.asp
http://business.timesonline.co.uk/tol/business/industry_sectors/telecoms/article717032.ece
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