Private Equity Leveraged Buyouts and Public Values: The Bankruptcy of Eircom, Ireland
31 Pages Posted: 1 Apr 2012 Last revised: 27 Sep 2012
Date Written: March 31, 2012
Background: In 2008 a study was commissioned by the Ministry of Economic Affairs of the Netherlands to investigate the potential impact of private equity leverage buy-out in the telecommunication sector on the public values that the government wished to safeguard. The study provided an extensive analytical framework and discussed three PE-LBO cases: Eircom, Ireland; TDC, Denmark; and BTC, Bulgaria. The study concluded that PE-LBO funds make offers that cannot be refused by shareholders, boards and management. Hence, there is no check-and-balance in the form of corporate governance operative. As governments have relinquished control, the targeted firm is left to the ‘forces of the financial market’. The outcome is predictable: financial engineering aimed at a major redistribution of capital, totally contrary to the public interests and likely to end in bankruptcy. The research report was submitted May 2009 and the conclusions and recommendations became subject of controversy within the Ministry. As a consequence the report remained confidential for seven month. During the ECPR Standing Group on Regulatory Governance conference in Dublin, June 2010, a contribution was dedicated to the study.
TPRC contribution: Friday, March 30, the Irish Times reported that Eircom had filed for bankruptcy in the High Court. Meanwhile, the PE firm involved in the TDC case has divested almost all international activities, which accounted for approx. 40% of the revenues, and took a first step in offloading the company through an IPO in 2010. In Bulgaria, the failure of the incumbent to supply broadband has led to approx. 670 ISPs providing fiber based broadband throughout Bulgaria, providing data rates in excess of 10 Mbit/s per customer. In this contribution the authors of the original study provide a review of the study, assessing the new realities with a focus on the developments of Eircom, using TDC as a comparative case.
Methodology applied: The study and contribution take an approach in the Veblen/Commons tradition. The telecommunications industry development is being linked to the development of public values, in particular the continuity of supply and infrastructure investment. The telecom reform process, whereby the government managerial control is replaced by entrepreneurial control – subject to the financial market regime and regulation – is identified as the ‘shift parameter.’ The role of public and private equity in the privatization process is discussed. The governance principles of the telecom firm are addressed to explain the ‘new’ managerial behaviour. The general operating principles of PE-LBO are related to the financial characteristics of the telecommunications sector. The three longitudinal case studies represent the related empirics. The dynamics of competitive markets and the PE-LBO developments are framed in two ways: along the lines of the ‘regulatory state’ and along the lines of the ‘developmental state.’
Conclusions and recommendations: We will argue that independent of which of these two role perception governments assume, we are confronted with a flaw in sector specific regulation, which needs to be addressed and resolved, or alternatively governments will need to accept – once again – the role of ‘lender of last resort.’ It implies the need for continuing ex-ante involvement of governments in the development of the telecommunication sector, not because telecom services markets are not functioning properly, but because financial markets are not operating in line with public interests. To safeguard public values the government will need to shift its role from a predominantly ex-post role perception to a more ex-ante involvement in the sector. In that case, ex-ante monitoring and potentially intervention will require a pro-active stance of government, which will have implications for the resources and capabilities of the supervising organisations involved.
Keywords: Private Equity Leveraged Buy-outs, Public Values, Telecommunication, Governance, Eircom, TDC, BTC
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