Secret undertaking favoured O'Reilly's consortium on Eircom

Charlie McCreevy undertook to change the tax laws in ways that facilitated O'Reilly's Valentia take-over of the telecommunications infrastructure

One of the more curious dealings Tony O'Reilly had with the Fianna Fáil-PD government related to the take over by a company, Valentia (also known as “Bidco”), controlled by him and associates, of Eircom in 2001. That transaction earned for Mr O'Reilly and his associates very considerable profits, while the “roll-out” of broadband by Eircom, during the period of Mr O'Reilly's stewardship has been the subject of considerable criticism.

Denis O'Brien was part of a rival consortium, E Island, bidding for Eircom and he was subsequently aggrieved when it emerged that undertakings had been made by the government to change the tax laws in a manner to encourage the Employee Share Ownership Trust (ESOT), which owned a crucial stake in Eircom, to support the O'Reilly/Valentia bid.

On 19 March 2004, Denis O'Brien made a formal complaint to the Director of Corporate Enforcement and the Stock Exchange's Takeover Panel about the manner in which Tony O'Reilly's consortium, Valentia (referred to here as “Bidco”), was enabled to acquire Eircom.

The letter of complaint referred to a letter written on 14 June 2001 by Mr Gannon of KPMG to Ms Brigid McManus of the department of finance, in which he (MR Gannon) referred to a telephone conversation of the same date and enclosed a submission in support of a change in the law. 

The letter on behalf of Denis O'Brien stated: “It is notable that Mr Gannon refers to his being under pressure not merely from the Eircom ESOT, but also from Eircom itself and ‘Bidco' (Valentia)”. 

On 21 June 2001, the then minister for finance, Charlie McCreevy, agreed to propose an amendment to the Taxes Consolidation Act 1997 in the Finance Bill 2002 with a view to facilitating the acceptance by the ESOT of Valentia's offer for Eircom. A letter written on 21 June 2001 by Ms McManus on behalf of the minister for finance stated this.

It was stated on behalf of Denis O'Brien that this 21 June 2001 letter “is evidence of an agreement, arrangement or understanding between the minister for finance of the one part and the ESOT (and Valentia and Eircom, for whom Mr Gannon spoke in his letter of 14 June 2001) of the other part designed to facilitate the acceptance by the ESOT of the Valentia bid”.

On behalf of Denis O'Brien it was argued: “The fact that the agreement was not disclosed at the time of the dealing ... gives grounds for a belief that the 21 June agreement may itself have constituted an unlawful dealing within the meaning of Section 108 of the Companies Act 1990”.

It was further stated: “It appears to us that the active involvement of the minister for finance, as both a representative of the state and a shareholder in Eircom (which we understand him to have been at the time) in promoting, or at least facilitating Valentia's bid to the detriment of E Island's was something which should not have occurred.  Once it did occur, it should have been disclosed to other shareholders, to E Island and to the market.  The active support of the minister, to the point of agreeing to propose (and, given his office, effectively to implement) a change in law, was certainly relevant to the process then under way.  For reasons which are described below, we believe the minister became an associate of Valentia's by this agreement and should have been disclosed as such.”

It went on to claim: “If it is the case that the board of Eircom was aware of the agreement reached between the ESOT and the minister for finance (as is strongly implied both by Mr Gannon's letter and by Ms McManus' memorandum), then its apparent support for such agreement and its failure to disclose the same to E Island may be considered by the panel to constitute frustrating action contrary to (the rules of the Stock Exchange).
It concluded: “It is appreciated that the information referred to and enclosed with this letter is not of itself sufficient to establish definitively the commission of any breach by any person of the Companies Acts, of the Takeover Rules or of the Listing Rule. No such allegation is hereby made as a matter of fact.  However, it is respectfully submitted that a prima facie case exists tending to indicate the possible commission of offences and/or possible breaches of either set of Rules, and that the statutory and other powers available to the Panel, The Irish Stock Exchange and The Director of Corporate Enforcement should be employed in further investigations”.

It has been argued that the manner in which Valentia proposed to finance the acquisition of Eircom – largely through borrowings – meant that the required investment in the telecommunications infrastructure would be compromised and that this is was indeed occurred.

Therefore the government's support for the Valentia take over appears the more curious.