Eircom / ST Telemedia

The business model is toast, but the companies that were targets of leveraged buy-outs during the credit bubble struggle on. Take Eircom, Ireland's unloved telecommunications incumbent. Sold five times since it was privatised in 1999, Eircom, now being stalked by Singapore's ST Telemedia, took on huge debts after it was bought in 2006 by Babcock & Brown Capital (BCM), an investment vehicle spun out of the now-bankrupt Australian fund manager. Finance charges on net debt of €4bn, about 5.7 times last year's earnings before interest, tax, depreciation, and amortisation – together with bloated labour costs and a pension overhang – mean Eircom may not be able to afford to invest enough in new services such as super-fast broadband.

That is a shame, because with a solid base of broadband customers and Ireland's third-biggest mobile phone business, Eircom has the makings of a decent turnround story. Management seems to realise this. In April, Eircom turned its nose up at a bid for parent company BCM – now renamed Eircom Holdings. The bid, tabled by Rob Topfer, a former BCM chief who masterminded the Eircom LBO in 2006, was financially driven, designed to take advantage of the fact that Eircom Holdings, which owns 57 per cent of Eircom, was trading at a discount to cash.

As an industrial buyer, ST Telemedia would be a more attractive owner of Eircom Holdings, although it is not clear how buying into Ireland feeds into the mobile group's Asia-focused strategy.

Eircom needs more than an absentee landlord. The best solution would be a kind of de-LBO, with lenders agreeing to refinance debt coming due in 2014, and employees agreeing to further job and benefit cuts in return for fresh capital. Yet Temasek, the Singapore state investment company that owns ST Telemedia, has been shifting new investment away from western economies. Eircom and its parent should approach any talks with a sceptical eye.

BACKGROUND NEWS ST Telemedia said on Monday that it was considering a bid for Eircom, the Irish telecoms group, in what would be its first significant acquisition outside Asia in several years. The Singapore state-owned telecoms group said it was currently in the process of evaluating a potential investment in Eircom through Eircom Holdings, the Irish company's Australia-based parent. Eircom Holdings, formerly known as Babcock & Brown Capital, owns 57 per cent of Eircom and also a Israeli-based Golden Pages business.

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