Valentia’s cash incentive fuels fire for Eircom IPO

13 Feb 2004

Valentia Telecommunications, the owners of Irish incumbent telecom firm Eircom, has reportedly increased the cash incentive it is offering bondholders in the company in return for approval to resume dividend payments. The move is aimed at making Eircom shares more attractive when the company embarks on its imminent flotation.

In recent days Valentia issued a consent solicitation to bondholders requesting permission to pay dividends – which is currently not possible according to the terms of the group’s outstanding notes – in the event of an IPO.

Valentia is proposing consent payments of as much as €20 for each €1,000 worth of bonds held, up from a maximum of €3.75.

However, the solicitation has not been welcomed by Standards & Poor’s Rating Service, which has reduced Eircom’s credit rating because it believes the cash incentives could weaken the company. Although more modest dividend payments are likely, Standard & Poor’s nevertheless believes that credit protection afforded to noteholders will be weakened over the next nine years. At Sept. 30, 2003, the group’s lease-adjusted total debt was €2.25bn.

“After a preliminary analysis of the current terms of the group’s revised financial structure and discretionary cash flow generation under the proposed transaction, Standard & Poor’s has indicated that it would most likely lower its corporate credit rating on Valentia by one notch to ‘BB+’ upon acceptance by bondholders of the consent solicitation,” said Standard & Poor’s credit analyst Michael O’Brien.

As reported previously in, Eircom’s owners Valentia embarked on a €1.1bn bond issue in conjunction with a number of major banks, including Deutsche Bank and Bank of Ireland, in August last year. It is understood Valentia had originally agreed to suspend dividends under the terms of the €1.1bn bonds issue agreement.

At an Oireachtas Committee on Communications meeting in recent weeks, Eircom rival Smart Telecom presented the committee with a 400-page bond issue document published on behalf of Eircom for its financiers and venture capitalists in August last year. 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.

While Eircom has confirmed that it is considering an IPO, the company has not committed to a date for the flotation, but revealed that Goldman Sachs has been appointed the lead adviser to the potential flotation. Unlike the Government-backed flotation in 1999 that valued Eircom at €8.6bn and was sold largely to Irish citizens, if Eircom floats this year it will be valued at between €3.2bn and €3.9bn and shares will be sold primarily to institutional investors.

By John Kennedy