B&B offers €2.36bn for control of Eircom

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Eircom, the former Irish state telecommunications monopoly, on Friday confirmed it had received an €2.36bn (£1.63bn, $2.86bn) takeover offer led by Babcock & Brown Capital, a listed investment fund managed by the Australian financial services company.

Babcock & Brown, which has built up a 28.8 per cent stake, is working with Eircom’s employee share ownership trust (Esot) that controls a further 21.8 per cent, giving the combined team 50.6 per cent.

The joint offer is thought to have been pitched at €2.20 a share, worth €2.36bn, compared with Thursday’s close of €2.14.

Eircom’s enterprise value rises to €4.3bn after including the group’s €1.9bn of net debt.

Allowing for a yet-to-be-paid but already forecast dividend of 5.2 cents a share, the offer would see shareholders reap a 48 per cent return in the two years since Eircom returned to the Irish and London stock markets, when it floated at €1.55 a share.

Eircom was floated in March 2004 by backers led by Providence Equity, George Soros’ private equity group, Sir Anthony O’Reilly, a former head of US food business Heinz, and Goldman Sachs. These investors are thought to have nearly tripled their equity investment in Eircom in a relatively short ownership period of barely three years.

They bought the business after it had endured a troubled existence as a listed business. It floated in mid-1999 not long before telecoms valuations peaked in one of Europe’s biggest retail offerings. However, investors who bought into that float fared badly.

Babcock & Brown has been steadily increasing its stake in Eircom to its current level of just under 29 per cent. It has already pledged to invest in Eircom’s infrastructure in the event it launched a full offer.

It has not acquired any shares at a price of more than €2.20.

An offer at that price is worth €2.36bn and is would represent a multiple of 7 times Eircom’s annualised ebitda [earnings before interest, tax, depreciation and amortisation] for the 12 months ending December 2006.

But Babcock & Brown Capital had previously warned of “considerable obstacles” to a bid. The Australian group had been anxious to reassure the Irish government, the regulator and the Esot about its intentions as an owner.

One concern has been the amount of additional debt Eircom might take on as a private business.

Phil Nolan, Eircom chief executive, and the rest of the top management team would be expected to be incentivised to run the business under the control of Babcock & Brown and the Esot.

Swisscom was last year poised to bid for Eircom, at a price rumoured to be around €2.30 to €2.40 a share, before the Swiss government, its majority owner, blocked it from completing large foreign deals.

Eircom last year launched a rights issue at €1.35 a share to fund the €420m acquisition of Meteor, Ireland’s third mobile business.

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