eircom ESOP A Case Study

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The Case for Change
A Strategic Response
eircom ESOP - A Case Study
The Original Deal
The Valentia Deal
Con Scanlon, General Secretary - Communications
Workers Union
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The Case for Change
Origins of ESOP
The ownership of eircom surfaced as a real issue
in the early 1990s - proposal for 40 equity
stake from CW
Competition
Regulation
May 1994 - Government gives Company six months to
develop a strategic alliance. Union felt that
there was a need to set out the strategic
rationale and criteria for such an alliance.
Debt Investment Policy
Protect Employment
Union concern was that the Governments desire to
raise money would take precedence over the need
to find a partner who help grow the business and
improve competitiveness, thereby securing
employment.
Universal Service
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The Case for Change
The Future of Telecommunications in Ireland
Develop a clear vision
We recognised that in order to face the challenge
of competition we needed to make ourselves as
competitive as possible and to focus on securing
the maximum commercial advantage from the
resources available to us.
Defend Market Share
Grow the Market
We proposed the development of a stronger
partnership between the company and its
workforce. Managers, Employees, Unions and
Government all had a common interest to secure
the future success of the Company.
Reduce Costs
Invest for the Future
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The Case for Change
Building a new understanding
Joint Strategic Group
It became obvious that restructuring the Company
would not be sufficient, it required a
significant transformation if it was to survive
and prosper in an increasingly competitive
market.
Sharing of Information
Unprecedented Change
The Union recognised that the traditional
response of increases pay in return for change
could worsen the cost issue rather than improve
it.
Manage Change Differently
We started looking at alternative strategies, and
an ESOP looked the best fit.
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The eircom ESOP
A Strategic Response
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A Strategic Response
ESOP - A Tried and Tested Solution
ESOPs were commonplace in the U.S. and Canada,
frequently arising where major change was
impacting, and were usually initiated by
employees.
No Ideological Barriers
Driven by Change
Ownership
The experience by and large was that companies
with ESOPs in place were out-performing their
peer group.
Job Security
ESOPs clearly had the potential to enhance the
value of the enterprise and also reward employees
for their contribution to making the business
successful.
Real Influence
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A Strategic Response
The eircom Analogue
Low Cost Competition
Despite strong commercial performance eircom
faced an uncertain future as further deregulation
was introduced.
Business Transformation
Improved Productivity
It needed to effect a transformation from a
domestic monopoly to operating in a global
competitive market.
Reduce Cost Base
Securing our members interests in a climate of
turbulent change was an enormous challenge.
New Work Practices
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A Strategic Response
Our Conclusions
The Inescapable Reality
We needed a radical transformation to achieve a
Breakthrough in the way we do business and on a
scale which simply did not compare with anything
we have had to do before.
Our goal was to give workers a real stake and a
real say in the future development of their
company which would ensure that Eircom continued
to be successful into the future.
Key Union Objective
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A Strategic Response
A New Model
Transformation
The traditional Industrial Relations approach was
inadequate to deal with both the scale and pace
of change.
Partnership Approach
Creating a new Partnership approach between the
Management and the Union would allow us to deal
with the transformation agenda in a
fundamentally new way.
ESOP
Focus also on creating a better understanding of
each others needs and the pursuit of shared goals
and objectives.
ESOP was the critical incentive for people to
support the transformation process.
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A Strategic Response
A New Model
Transformation
The traditional Industrial Relations approach was
inadequate to deal with both the scale and pace
of change.
Partnership Approach
Creating a new Partnership approach between the
Management and the Union would allow us to deal
with the transformation agenda in a
fundamentally new way.
ESOP
Focus also on creating a better understanding of
each others needs and the pursuit of shared goals
and objectives.
ESOP was the critical incentive for people to
support the transformation process.
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The eircom ESOP
The Original Deal
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The eircom ESOP
ESOP Principles
Government had set a benchmark of 5 equity for
the change agreement. We on the other hand were
seeking a 14.9 ESOP.
Long Term and Collective
Corporate Governance
We needed therefore to devise an acceptable
mechanism to fund the remaining 9.9
Board Representation
Valuation of the Company was obviously a critical
issue.
Tax Efficient
Needed to change the Finance Act to enable
retired employees to continue to hold shares
beyond 18 months.
Exert influence
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The eircom ESOP
eircom ESOP Basics
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The eircom ESOP
Structure of Eircom ESOP
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The eircom ESOP
Transformation
The Transformation Agreement provided for some of
the most radical changes in work practices and
the introduction of new technology and
operational support systems on a widespread scale.
110m cost reductions
Staff Reductions
Bonus Elimination
We introduced a new approach to dealing with
re-skilling and redeployment by developing
employment pathways through a dedicated Resource
Business Unit.
New Overtime Provisions
We committed to focus on the business and to
expedite the introduction of change to meet
business needs.
New Work Practices
Atypical Working
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The eircom ESOP
The Valentia Deal
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The Valentia Deal
Strategic Alliance
ESOP
IPO
Tech Stocks
Retail Investors
Demerger
LBO
Small Domestic Market
Increasingly competitive domestic market.
Large strategic shareholder ( KPN/Telia ) looking
for an exit.
Comsource Overhang
500,000 small shareholders nursing sizeable
paper losses.
Non-compete agreement
Limited interest from potential buyers for parent
company.
Price Pressures on Fixed
Opportunity for ESOP to enhance its stake in the
company
Regulatory Environment
Conference and NEC approval for strategy
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The Valentia Deal
Post IPO - lead up to fixed line sale
Hostility in Press
Eircom - a profitable company, no debt and good
revenue flows.
Tech stock collapse - Eircom share price had
fallen from ?3.90 (IPO) to approx ?2.40
Board under Pressure
AGM - angry retail investors , CEO and senior
management under pressure - fixated on unlocking
shareholder value
No Coherent Strategy
Vodafone bid for Eircell (mobile division) - CEO
supported bid - Triggered bids for fixed line
business.

• Took decision not to oppose Break-up of company .
• Terms and Conditions for employees transferring
• Union Recognition Agreement
• ESOP Compensation
• Focus on Fixed Line Business
• Secure our position - bigger battle ahead

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The Valentia Deal
ESOTs Objectives
The purpose of the ESOT is to encourage and
facilitate the acquisition and holding of shares
in eircom or a successor company.
Maintain Investment
Preserve Value of Assets
Cash Offer would result in a significant tax
charge - Tax position preserved if ESOT accepted
equity share offer.
Favourable Tax Treatment
Get Best Advise Possible
Secure sufficient rights to enable the Trustee to
protect value of ESOT assets
Directors of the ESOP Trustee have a fiduciary
responsibility to act in the interests of current
Participants taken as a whole
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The Valentia Deal
Evaluation of Options

• Maintain public listing - ESOT retaining its
  14.9 stake
• Retains current financial flexibility due to low
  leverage
• Greater liquidity in theory, but subject to
  market conditions
• Possible lack of board level leadership to
  invigorate business
• Stock overhang - Comsource desire to exit
• Likely negative impact on share price if LBO does
  not occur
• Low financial risk
• Increasing operating risk

Status Quo

• Participate in LBO - ESOT increases its
  percentage ownership
• Enhanced corporate governance rights
• New management team to reinvigorate business
• Comsource exit
• Secures premium valuation implied in share price
• Significant leverage
• Limited liquidity of investment
• Some exit risk
• Increases financial risk
• Addresses certain operating risks.

Leveraged Buy-Out
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The Valentia Deal
Shareholding in Eircom post IPO
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The Valentia Deal
Shareholding Post - Vodafone deal
14.9 of eircom (329m shares)
14.9 of eircom
156m Vodafone shares
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The Valentia Deal
Valentia Offer - ESOP Proposal
Sold 14.9 in eircom

• Offer of ?1.365 cash per eircom share valuing
  ESOPs stake at ?449 m
• ESOP Proposal
• subscribe for 29.9 of ordinary share capital in
  Valentia (25 voting rights) for ?202m
• subscribe ?247m for preference shares with 11.5
  PIK coupon

Reinvested in Valentia
?449m Bridging Loan
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The Valentia Deal
Shareholding Post Valentia deal
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The Valentia Deal
Shareholding Post Valentia deal
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The Valentia Deal
The ESOP Transactions
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The eircom ESOP
Conclusion
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Conclusion
Summary

• eircom ESOP is notable in Ireland for being
• first leveraged ESOP
• first revenue approved ESOT
• employee-controlled
• first ESOP with right to nominate director(s) to
  main board
• largest ESOP in terms of
• value ( ?770m )
• number of participants ( 14,000 )
• first distribution of ?12,700 in shares to
  beneficiaries of ESOP in May 2002.

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Conclusion
Advisors View
Without doubt, it has created a new paradigm for
employee participation and has taken the concept
of employee ownership to a new level in terms of
influence, investment and ability to participate
in the future success of the business.
SSSB believes that the Eircom precedent will
trigger a wave of similar transactions in the
medium term which could be utilised by potential
sellers to provide solutions to company-specific
issues and by potential buyers to secure assets
otherwise not available. Schroder Salomon Smith
Barney
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The eircom ESOP
ESOP - a solution for some?
Con Scanlon, General Secretary - Communications
Workers Union