Hedge funds and Private Equity - PES

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Eircom case, Ireland
Eircom is the former national operator in Ireland, provider of fixed-line telecom services with
approximately 2.2 million fixed-lines. When eircom was privatised by the government in 1998,
it was relatively inefficient in terms of comparison to incumbent operators in leading countries
in Europe, and in need of significant investment. The shares were purchased by a wide crosssection
of Irish citizens. The Valentia private equity consortium acquisition in late 2001 was
mostly debt financed. After the acquisition eircom repaid Valentia debt by issuing bonds
which increased debt from about 25% to 70% of its capital structure.
Eircom capital expenditures declined from E700m per annum in 2001 to 300m in 2002 and
200m in 2003 and 2004. In 2001 eircom invested its internally generated capital from depreciation
allowances plus another E275m. Between 2002 and 2004, it invested more than
E450m less than its internally generated capital from depreciation allowances. This enabled
payment of a €400m dividend to Valentia.
The second public stock offering was successfully floated in 2004 at a significant profit. And
in 2006 Private Equity firm Babcock and Brown from Australia purchased eircom, again
through debt finance. Eircom has now a debt ratio on the order of 117%. Although the new
owners have announced their intention to invest in upgrading the eircom network to European
broadband standards, eircom’s capacity to invest significant amounts seems virtually straitjacketed.
The new owners have petitioned the government to contribute funds to support
universal service and indicated that pricing policies will need to be reviewed.
Investments in long-term staff development, research and development, upgrading the quality of
service and restoring public service obligations are all likely to be necessary to return infrastructure
operations to a level of preparedness for long-term development. Infrastructure
operators with significant monopoly power may have to seek higher prices from consumers to
help finance the restoring of infrastructure operator standards. In the circumstances of the public
utilities, the entry of the Private Equity Funds is unlikely to bring strategies for long-term investment
in infrastructure development. Rather it is likely to bring strategies for disinvestment through
massive cash payouts. These in turn can be expected to have significant negative multiplier
effects on economic growth for the economies dependent on the continued development of
these infrastructure services.
3.4 Cases about Public Utility Sector: Telecommunication
The telecommunication (telecom) sector has been most subject to privatisation of incumbent
national operators. Most of the EU’s original 15 countries have privatised their national operators
in whole or in part and are traded on public stock exchanges. The new EU member counties
are at various stages of planning and implementing privatisation policies. The telecom sector is
where there is the most actual experience with privatisation and where there have been a few
instances of Private Equity takeovers.
Telecom is also important because the sector is growing rapidly as a result of the convergence
of computing and information technologies with telecom infrastructure technologies and services.
Long-term investments in new upgraded broadband telecom networks are now underway
in order to provide the essential infrastructure for future Internet and electronic commerce services
that will underpin Europe’s information society.