The Irish stock market gave a clear thumbs down to Babcock
and Brown Capital (BCM) buying into their local telephone company last night –
Eircom shares fell 5.4 per cent.

While there are plenty of people scratching their heads,
wondering if this is really the best deal the highly-paid B&B geniuses
could come up with after nine months of looking, it should be recorded there is
at least some immediate upside.

The $350 investment triggers BCM’s requirement to start
paying 1 per cent management fees to Babcock and Brown. Thus the mini-Macquarie
mob now have the meter running at a rate of $10 million a year while they think
about finding a home for the other $650 million over-enthusiastic punters have
trusted them with. There’s plenty of upside, of course – for more fees.

B&B are trying to paint Eircom as Ireland’s
equivalent of Telecom New Zealand, rather than Ireland’s
equivalent of Telstra. Eircom should be so lucky as to be anywhere near as well
performed as either.

For example, Eircom’s latest financial report was for the
June quarter. Revenue was down a couple of million euros from the previous
corresponding period to E399 million. Operating costs increased by 5 per cent
though to E264 million. The bottom line profit of E60 million was an
improvement on the E6 million loss the previous June, but most of that profit
came from a E46 million profit on the sale of property. Not flash.

And the balance sheet shows this certainly is no potential
assets stripping play – there aren’t many. Total assets as of June 30 are supposed to be E3,928 million
– but that includes E684 million worth of intangibles.

Total liabilities stand at E3,679 million – and they’re not
intangible, meaning the company has negative net tangible asset backing. The
balance sheet claims shareholders’ equity of E249 million – down from E375 million three months previously.

Eircom has a colourful Irish history as well – a
privatisation of the telco monopoly that fell over in the dot com crash, was
privatised by a syndicate led by Sir Tony O’Reilly and then refloated. O’Reilly
remains chairman.

The great hope O’Reilly holds out for Eircom is the purchase
of a mobile phone company, Meteor, which
has just 10 per cent market share. Otherwise, the company suffers all the usual
problems of being the landline incumbent – except that it doesn’t seem to have
handled them as well as Telstra and Telecom NZ. The regulation issues for copper wire,
insufficient roll out of broadband, plenty of dissatisfied customers etc etc.
Maybe they need to import some American executives.

Yep, if this is the best Babcock and Brown could come up
with after scouring the globe for nine months, the fish they rejected must have
been truly scabrous. The deal only makes sense if there is a subsequent takeover
bid for Eircom as part of the much-promised rationalisation of smaller EU
telecoms. But you’d have to wonder why anyone would bother.

Oh well, at least they’re now collecting their management
fee.

Peter Fray

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