Having spent seven years fighting Eircom in the fixed line business, Mr Denis O'Brien and Mr Leslie Buckley know the company better than most. They have rarely been flattering about their larger rival and have missed few opportunities to take pot-shots at it. Among the more colourful was a Denis O'Brien speech in October 1996 when he accused the slow-moving state company of blocking access to the information superhighway in a manner that "would put Dick Turpin to shame".
The revelation that Mr O'Brien and his partners were now considering paying €2.2 billion for Eircom Ireland - as the fixed line business is now called - confirms what the management of the former state monopoly have been saying for years: the fixed line network is a valuable business with a bright future. It currently accounts for €1.7 billion of the company's €2 billion turnover and last year made profits before interest and tax of €660 million. It has 1.6 million customers and looks like something of a bargain at the €2.2 billion price that Mr O'Brien has offered.
By the time Mr O'Brien sold out of Esat Telecom in January, Esat's fixed line business had a turnover of only £100 million a year and after 10 years of hard slog a mere 12,750 corporate customers. Its target for the residential market which it was only entering at the time, was a modest 25,000 by the end of this year. The bulk of the €2.6 billion paid by British Telecom for the company related to the group's 49 per cent stake in Esat Digifone, the second mobile phone company.
Eircom, or Telecom Eireann as it then was, fought Esat every step of the way over the last decade. Five years ago the smaller company formally complained to the European Commission that Eircom was abusing its dominant position by charging Esat too much to handle its traffic. Having initially appeared to support the Esat complaint the Commission ultimately found in Eircom's favour and was critical of the way Esat presented its case. There were numerous other skirmishes between the companies in the press.
Eircom's fixed line business is now facing unprecedented competition following the opening up of the residential market to competitors this year. At the forefront of this challenge are the two large cable companies, NTL (formerly Cablelink) and Chorus (formerly Irish Multichannel. Both are offering phone services as part of a package which will include cable TV and Internet. Eircom Ireland has already responded, cutting its prices in anticipation of the move and it is investing in a new technology, called XDSL, which will upgrade normal copper phone lines to carry television signals and high-speed Internet.
The heat will be turned up a notch next year when the European Commission wants Eircom and the other dominant players in Europe to give up their monopoly over the local loop - the last few miles of wire between individual customers and local exchanges. At present, competitors including Esat, have to rent local lines from Eircell.
Mr O'Brien and his backers are well aware of the competitive pressures facing Eircom. He will also have a good idea of Esat's ability to compete and as well as its competitive strategy It is clear that Mr O'Brien believes that defending Eircom's dominant position will be an easier job than attacking it. One factor that must inform his thinking is the problem which other telecom start-up have had in persuading the customers of existing service providers to break long-standing relationships.
One aspect of Eircom's business, which will be a foreign country for Mr O'Brien, is its traditional industrial relations environment. Eircom has a mature workforce that is heavily unionised and in addition the staff own 15 per cent of the company. Esat's workforce is not unionised and mainly comprises younger employees with a strong team ethos who have been individually incentivised.
Mr Leslie Buckley however is no stranger to cutting the fat out of mature business. An industrial relations specialist, he has been involved in the successful re-organisation of a number of businesses including Waterford Glass and Irish Steel.
Once Mr O'Brien's consortium formally makes its bid, the board of Eircom will the have to decide whether to enter into formal talks. Mr O'Brien, who has the backing of the American bank, Chase, will have to show that he has the money to complete the deal and that he is capable of running and developing the business.
It is understood that Mr O'Brien is only interested in a friendly takeover which will have the support of both staff and shareholders. Industry sources said yesterday that he was being opportunistic by making his move when Eircom was already in talks to sell Eircell - its mobile arm - to Vodafone. If both sets of talks are successful then it is expected that both deals will be put to shareholders as a package. As a result Mr O'Brien may get away with paying less for the fixed line business than if he tried to buy it otherwise.
If the Eircom board refuses to sell out to its former arch-rival, it will have to justify the decision. This will involve convincing the market that it has a viable strategy to develop the business itself. To date, it has failed to elucidate any post-Eircell sale strategy.
