You should care about Eircom — our economic wellbeing depends on it
Its survival is not guaranteed, even as it tries desperately to cut its costs by removing even more workers from its payrolls and paying the remaining workers less. It is going to ask its lenders to accept only partial payment of what is due to them. If things do not work then it is possible that parts of the business could be sold to rivals and others shut.
You might wonder why you should be worried by this. After all, the country has enough financial problems to worry about, both with the public finances and the banks before we even consider private debt, with having to care about what’s going on at a privately owned company. But Eircom remains an enormous and important company in the Irish economy and its future as a sustainable entity is important to the national economy.
Eircom remains the dominant provider of fixed-line phones and even if the numbers using such phones are dropping in the mobile era they remain important to many individuals and businesses. Competitors need access to the Eircom infrastructure, to rent from it. Eircom is Ireland’s leading broadband provider with over 500,000 customers. Its mobile subsidiary Meteor has more than one million customers and it has tried to build on this with a new brand, E mobile. The Eircom business includes the alarm company Phone Watch, directory enquiries and the relatively small number of remaining public pay phones.
Admittedly Eircom should be even more than it is. It has been blighted by a history of under-investment over the last decade. It defends itself by saying that it has invested hundreds of millions of euro in new technology and infrastructure in recent years but it has not invested in next generation broadband infrastructure to anything like the extent that it should. For example, customers living more than 5km from an Eircom exchange cannot get broadband from it. While things in broadband provision have improved for many — a few years ago complaints throughout the country were legion — there are still large chunks of the country where the service is inferior and if Eircom cannot supply it nobody else will (other than on less reliable mobile services). We still do not have a sufficiently strong broadband provision in this country: the capacity and speeds, while much improved, are not good enough and the prices do not compare well to the rest of the Europe.
The lack of investment means that the country is far too dependent on mobile broadband to provide the impression of a full telecoms infrastructure; it is too important to our ability to compete for business internationally for our policy makers not to be worried about it.
This is not all Eircom’s fault admittedly — once it was sold out of State ownership its national responsibilities were diluted. However, the nature of the competition is that other service providers want to piggyback the existing Eircom infrastructure or, if they do it for themselves by investing in their own alternative network, will only do in centres of large population where the volume of customers provides a greater likelihood of a profitable return on investment.
Large swathes of the country cannot get the heavily advertised UPC services for example (where broadband internet and fixed-line phone services are connected to the provision of television services) so competition does not necessarily exist in all parts of the country to provide the answer.
Eircom is an old-fashioned telecoms business that has suffered from a combination of the loss of its monopoly and a financial assault by a succession of owners who have loaded it with debt and taken the cash for themselves before selling it onto others. Fortunes have been made along the way by previous owners and, it must be said, by the Employee Share Ownership Trust (ESOT) although it now faces a different future as a continuing shareholder. The level of debt carried by Eircom has been allowed to grow to frightening proportions. It is slightly complicated but here’s what Eircom owes: it has what is called net senior debt of €2.7 billion but also owes €350 million to what are described as “floating rate noteholders” and another €630 million in “payment in kind” notes. What is important is that it has a little time on its side to sort these things out: it is due to make a repayment of €24 million in June this year and €296 million by June 2014. However, the rest of the debt must be repaid over the following three years and there is a pressing problem. If certain revenue and profit projections are not achieved by August then Eircom could be in breach of its banking covenants, meaning the lenders could demand earlier repayment. This is very possible as Eircom’s revenues declined by 6% to €880 million in the six months to the end of December 2010, and it continued its loss of customers in its fixed-line business and revenues fell too in its mobile businesses.
The recession is having its impact too, with people either having less reason to use Eircom’s services or restricting their use because they can’t afford all of the costs. Danger could be averted by the provision of new capital from its owners — probably about €50 million this summer would do the trick in the short term — but not surprisingly they are reluctant to provide the funds with such uncertainty about the ability to make further repayments to lenders and fears about what return they would get on the investment if profits continue to fall. STT and the Esot apparently might invest up to €300 million in Eircom but only if this is accompanied by massive change within the business.
The company is having talks with its lenders, seeking to reduce the debt by about €800 million. It remains to be seen what will have to be given in return but it seems likely that banks and bondholders will be offered shares in return. Part ownership is better for the staff than leaving them have total control. Should that happen then the cuts that would be imposed would be enormous. From a national point of view new ownership of Eircom by banks and bondholders would most likely mean chronic under-investment in development of the infrastructure or the sale of assets piecemeal while others were closed.
The company’s 7,170 workforce is being asked to contribute €92 million in “labour savings”. This involves an effective 10% pay cut, delivered by getting workers to take one day in 10 off in return, or in other words having a nine-day fortnight, while delivering the same productivity. There will be further changes to work practices and more restructuring of business units. Having already shed about 1,800 staff over the last two years another 1,000 may go by way of voluntary redundancy. The Communication Workers Union is trying to sell the deal to its members and has organised meetings with workers. It will send ballot papers to workers next week and they have until March 30 to cast votes. It is likely that the CWU will gain acceptance.
But Ireland has not done well out of the Eircom debacle. None of its unfortunate history of financial pillage, some done by Irish and some foreign investors can be undone, but even if continuing in private ownership we need Eircom to be restored to good financial health if it is to contribute properly to our economic future.
