Eircom to ‘make €150m a year’ from line rental hikes

28 Jan 2004

Evidence in the form of a bond document presented to this morning’s Oireachtas Committee on Communications by Smart Telecom alleges that Eircom stands to make €150m in additional revenue per annum as a result of the most recent line rental price hike, an increase of 45pc from line rental four years ago.

The licensed competitor claims that Eircom is taking huge profits, cash flow and paying massive dividends to its shareholders out of the pockets of Irish consumers and businesses.

The Oireachtas Committee on Communications, Marine and Natural Resources was convened today to probe Eircom’s decision to increase its line rental charges, the third such increase in 12 months. The new price of €24.18 is €10 higher than the EU average and will make line rental in the Republic of Ireland €9 more expensive than France and the UK.

Critics allege that Eircom is using the price hikes to boost its valuation in time for an imminent initial public offering (IPO). The company confirmed last week that it is considering an IPO but said no ultimate decision had been taken by the board and the timing of any floatation would depend “on market conditions and other factors.” Eircom’s shareholders are understood to be planning a March floatation that would value the firm at between €3.2bn and €3.9bn. Goldman Sachs has been appointed the lead adviser on the proposed flotation, which falls significantly short of the €8.6bn valuation given to the company when it was floated on the Dublin, London and New York exchanges in 1999.

Smart Telecom presented the Oireachtas Committee with a 400-page bond document allegedly published by Deutsche Bank on behalf of Eircom to its financiers and venture capitalists last year when the company was seeking approximately €1bn in additional funds. The document claimed that Eircom was generating operating profits of over €500m per annum. The document also claims that US venture capitalists and financiers that invested approximately €900m in Valentia’s bid to acquire Eircom in 2001 have already received 75pc of their initial investment back and stand to secure a further payoff of up to €1.4bn if the upper end of Goldman Sachs’ valuation expectations are to be released. Smart Telecom has claimed that a proposed IPO at a valuation of up to €4bn would generate a total payout to venture capitalists and other investors of around €2bn within two and a half years of their initial investment.

According to Smart Telecom, the bond document shows that Eircom plans to maintain lower levels of investment in its network, and quoted figures that showed that compared with an investment of €504m in the financial year 2000/01, this fell subsequently to €312m in 2001/02 and €197m in the financial year 2002/2003.

Speaking to siliconrepublic.com this morning, Smart Telecom chief financial officer Brian Timmons said that with gains of €150m per annum from this year onwards as a result of the third price hike would result in cancelling out the €197m annual network investment to only €47m in real financial terms.

Also speaking at this morning’s Oireachtas Committee meeting was ALTO chairman Iarla Flynn who argued that Eircom’s monopoly on line rental was hurting independent licensed telcos. In a statement Flynn said: “Eircom’s monopoly on line rental is a serious inhibitor of real choice and competition in the Irish telecoms market. Marketshare of new entrants stands at just 10pc, well below the EU best of 30pc. Eircom has simply hiked up the price of its line rental to make up for business lost to lower cost competitors, and to fund its own call charge reductions. What the consumer saves in lower call charges they simply pay back to Eircom in the form of increased line rental.

“This is surely not what was intended by liberalising Ireland’s telecommunications sector,” said Flynn.

Asked to express in blunt terms whether he believed Eircom was trying to boost its valuation in time for an impending IPO, Dermott Jewell, chief executive of the Consumers’ Association of Ireland said: “In blunt terms, yes. This has been represented by the past three [line rental] increases.”

The chairman of the Oireacthas Committee on Communications, Noel O’Flynn TD, said that solicitors for the Oireachtas committee would review Smart Telecom’s evidence in terms of its admissibility. This afternoon ComReg is expected to present its reasons for approving Eircom’s recent price hike, followed by Eircom itself. The Minister for Communications, Marine and Natural Resources, Dermot Ahern TD, is also expected to outline his views and plan of action surrounding Eircom’s line rental price hike.

By John Kennedy