Regulatory environment is toughening — Citigroup

2 May 2006

Eircom’s 21st-century management has done a remarkable job halting a rising tide of political pressure, regulatory change and competition, a report from Citigroup suggests. However, the tide looks like it’s about to change with a toughening regulatory environment, says Citigroup, which adds that the Babcock & Brown acquisition will most likely go ahead.

In a report directed at Eircom shareholders Citigroup points to two forthcoming Bills designed to empower the Commission for Communications Regulation (ComReg).

These include a Statutory Instrument and Miscellaneous Provisions Bill that Citigroup claims will enforce change, specifically around the local loop unbundling (LLU) issue, and result in a sharp increase in competition for Eircom.

Citigroup highlights the fact that in the past 12 months Eircom has been increasing its grip on the Irish telecoms market. “The Irish regulator (ComReg) remains essentially toothless. As a consequence, key elements of the regulatory framework necessary to facilitate competition remain absent.

“In the meantime, Eircom has maintained its grip on the small and medium-sized enterprise (SME) and consumer markets (in broadband Eircom continues to win four out of five DSL additions) while redoubling its efforts in the large corporate market with some notable success.

“If anything, Eircom has enhanced its position in the Irish market over the past 12 months, albeit at the cost of some margin pressure as sales and marketing costs rise. The addition of Meteor has added another pillar to the story and early signs about the scope to take [market] share are encouraging.”

In another passage of the 30-page report, Citigroup says: “Eircom has become a textbook example of how to play the regulatory game and win.”

In terms of the potential takeover of Eircom by Babcock & Brown, which along with the Employee Ownership Trust now owns up to 55pc of Eircom, Citigroup says there is only a 5-10pc chance of an offer not materialising.

If the Australian investment firm Babcock & Brown does emerge as the new owner of Eircom it will have to face structural issues such as the cost of headcount reduction. A typical Eircom employee, Citigroup says, might be male, over 40 with knowledge of the old copper/circuit switched technologies but not of the new IP world.

As a result, says Citigroup, these people need to be incentivised to leave and Eircom has been budgeting €140,000 per employee to cover severance costs.

“We would expect a higher proportion of white collar employees to leave the business, resulting in an inevitable increase in cost per employee ‘downsized’, the Citigroup report says.

By John Kennedy