Business Opinion: The Eircom Employee Share Ownership Plan or Esop looks to have pulled off another masterstroke. As Eircom prepares to change hands again, the Esop has once more manoeuvred itself into a position of advantage, while managing to stay on the right side of the general principle that all shareholders in a company must be offered the same terms in a takeover.
The key to the Esop's success this time round are the preference shares that it received in the 2004 flotation of Eircom alongside its stake in the company's ordinary equity, which now stands at 21.5 per cent.
While the Esop will be offered the same as everybody else for its ordinary shares, €2.20 in cash or some new preference shares in the Babcock & Brown bidding vehicle, it is being offered something much more interesting for it's existing Eircom preference shares. It will exchange these for an equity stake in the Babcock & Brown bidding vehicle, making it a co-offeror for the company.
It is a neat trick, and on a par with the Esop's other great coup when Eircom was taken private for the first time in 2002 by the private equity partners in Valentia. Then the Esop parleyed its 15 per cent stake in the company into a 30 per cent interest
The man who engineered all this did not go unrewarded as became apparent in the prospectus for the 2004 reflotation of Eircom. Con Scanlon, the general secretary of the Communications Workers Union was the kingmaker in the 2002 battle between Valentia and Denis O'Brien's eIsland consortium. With his joint roles as head of the union and chairman of the Esop he was able to deliver the Esop for Valentia. As part of the deal he negotiated himself the job of deputy chairman of the company.
His control of the Esop remained unchallenged until the company's return to the market in 2004, when the details of Scanlon's package emerged. He trousered some €1.9 million between shares and a special pension package. It will be interesting to see what deal Scanlon cuts this time.
And what is wrong with Scanlon being handsomely paid? After all he has made a lot of money for the beneficiaries of the Esop. A figure of over €1 billion across its 12,000 past and present members is being bandied around, although a good deal of this remains tied up in Eircom shares. And the beauty of it is that it is all tax-free thanks to some fancy footwork - such as the use of preference shares - which has preserved the tax-free nature of Esop payouts.
Looked at from this perspective - which one suspects is close to from where Scanlon is viewing things - there really is nothing to get very excited about.
But, when viewed from the perspective of what Esops were meant to be about, it's not quite so cut and dried. The purpose of the original Telecom Eireann Esop was to give the employees of the company a real stake in the business. It was negotiated in return for changes in work practices by Con Scanlon's predecessor, David Begg (now the general secretary of Ictu). It also served to facilitate the first flotation of the company.
Under Scanlon the Esop chose to take a very narrow view of its mandate, which it interpreted as maximising the return to the Esop members. This allowed the Esop to support a number of moves which, it has become apparent with hindsight, were not necessarily in the interest of the company, its workers and the wider constituency of stakeholders.
They include the sale of Eircell together with the take-private by Valentia and subsequent loading of the balance sheet. The return to the market in 2004 could be seen as a step in the right direction, but is set to be reversed should the current deal go ahead.
All of these transactions were financially beneficial for the Esop and can be justified by the narrow view taken by it of its mandate.
What, exactly, should the mandate of an Esop be? Should it just focus on the money or does it have an onus to act in the wider interest?
It is a very relevant question with the prospect - fading though it may be - of Aer Lingus coming to the market with a significant stake held through an Esop. Equally, the other large state companies, such as the ESB, that are seeking to throw off the shackles of state control all have Esops.
The answer to this question probably lies in the answer to another question. Namely, why do Esops have favourable tax treatment? At present the payouts from Esops are tax-free (subject to an annual limit).
The amount of money forgone by the state in tax on the gains made by the Esop runs into the hundreds of millions. And, like any tax break, it needs to be justified. Merely serving to encourage workers in successful companies to accept free gifts of shares is not much of a reason. The financial returns to Eircom Esop members would still be very attractive even if they were subject to the same tax as other shareholders.
It is hard to escape the conclusion that the tax concessions given to Esops reflect the concept that they convey a wider benefit and are in the public interest. If Esops behave simply as wealth managers for their members, regardless of the wider consequences, then they should be subject to the same tax treatment as other wealth managers - and so should their members.
