Denis O'Brien's eIsland consortium was emphatic yesterday that because Valentia had made no formal offer for Eircom before eIsland made its claimed "knockout" bid, KPN and Telia's commitment to accept the Valentia offer had not taken effect. KPN and Telia combined own 35 per cent of Eircom shares.
The clear inference from the O'Brien camp was that KPN and Telia were free to accept the higher eIsland offer, an offer that is worth an additional €38 million (£30 million) to the Swedish and Dutch telecom companies.
KPN and Telia themselves refused to make any comment on the status of those acceptances, but it is understood that their legal advice is that their agreement with Valentia cannot be unwound. This legal advice was given to the Eircom board at last night's meeting.
The status of the Comsource acceptances may come down to legal interpretation and the possibility of a legal challenge by eIsland cannot be ruled out, now that KPN and Telia have indicated that their agreement of June 11th with Valentia is valid and cannot be unwound. Sources close to eIsland indicated last night that if Comsource did adopt this course, eIsland might seek an injunction to prevent the irrevocable acceptances being enforced. Such a move would bring the Eircom takeover to a standstill until the courts decide the outcome.
If, on the other hand, KPN and Telia decide that their acceptances have not taken effect because of the absence of a formal offer for Valentia before the eIsland increased offer, it could also leave them open to legal action from Valentia if the O'Reilly consortium takes the view that the acceptances are valid and should not be unwound. KPN and Telia are thus walking a legal tightrope.
The Rule 2.5 document from Valentia that formally starts the offer period was released last night. The document repeats that the Comsource acceptances are irrevocable and cannot be unwound.
The source also added that because eIsland's €1.375 cash plus warrants offers is guaranteed by J.P. Morgan Chase, it is the equivalent of cash and is thus over the €1.355 level that releases Comsource from its obligations to Valentia. This also has been rejected by Comsource.
Despite Mr O'Brien's conciliatory noises towards the Employee Share Ownership Trust yesterday, the ESOT agreement to accept the Valentia offer is bound in cement and will not be unravelled by the higher offer from eIsland. No ESOT spokesman was available for comment but it is understood that the trust made it clear to the Eircom board ahead of yesterday's meeting that it is firmly committed to Valentia.
By binding itself so tightly to Valentia, the ESOT is in effect putting its own interests first. Part of the ESOT's agreement to Valentia allows the trust to increase its stake from 14.9 per cent to 29.9 per cent. The lower the eventual bid price for Eircom then the less that the ESOT will have to pay for its additional 15 per cent stake.
The fact that this means that other shareholders will have to suffer financially is not a factor in the trust's thinking. The ESOT is there, purely and simply, to look after the interests of the members of the trust and is bound by its articles to act accordingly.
The cost of the ESOT's 14.9 per cent stake in Eircom is thought to be in the order of €0.85 a share compared to the €3.90 that private and institutional investors paid in the July 1999 flotation. In effect, the ones who are losing money on their Eircom investment are those who subscribed to the initial public offering. KPN and Telia are sitting on a modest profit while the ESOT has made substantial gains.
If it ends up that Eircom shareholders are deprived of the higher eIsland offer from Eircom because of the sectional interest of the ESOT and the Comsource irrevocable acceptances, it will not be the first time Irish investors have been deprived of the highest bid in a takeover battle.
Back in 1987, shareholders in Irish Distillers (IDG) were deprived of a substantially better offer from Grand Metropolitan (now part of Diageo) when the Supreme Court ruled a "handshake" agreement meant Fyffes had to sell their key shareholding in IDG to Pernod Ricard.
Coincidentally, one of the hands involved in that controversial IDG "handshake" agreement in 1987 was Mr Jim Flavin, then a director of Fyffes. Mr Flavin is also a current non-executive director of Eircom and was involved in last night's crucial meeting.
