eircom re-values network with an eye on higher rental fees

27 Nov 2006

According to reports in the Irish Sunday Business Post, the country’s former monopoly operator eircom is to re-value its fixed line network assets in a bid to improve its case for imposing higher line-rental charges from the telecoms watchdog ComReg. The telco’s new owners, Babcock & Brown Capital and the Eircom Employee Share Ownership Trust (ESOT), completed their EUR2.4 billion USD3.1 billion) takeover last August and are conducting the revaluation process to allow it to argue for higher rental fees, as charges are based on the company receiving a fixed return from its investments in the PSTN. Under existing rules, ComReg can allow eircom to earn returns of 12.5% as an incentive for it investing in its network. The return is then factored into its calculations for setting line rental prices. The Irish Sunday Business Post estimates that a EUR500 million increase in the value of the incumbent’s PSTN could result in a rise in its earnings before interest and tax (EBIT) of as much as EUR62 million.

A spokesman for eircom pointed out that the process to revalue the operator’s network had been triggered automatically under the country’s accounting rules procedures when the company was sold to Babcock & Brown. He went on to say that the company had not made a formal application to the regulator for a line rental hike and that the revaluation process remained as the primary tool for assessing monthly rental fees. This would not change until the end of 2007, he added. For its part, ComReg is likely to resist any attempts from eircom to increase rental costs and will probably try to impose a reduction on the 12.5% returns figure as part of any deal.

Increasing the value of PSTN could also result in eircom being stung with higher depreciation and amortisation charges and the operator’s new owners have already warned shareholders to expect a substantial reduction in reported profits in future years on the back of such charges. On a more positive note, the revaluation could improve eircom’s stretched debt position by helping to reduce its debt to asset ratio.