From Socialist Voice, August 2010

Privatisation and its consequences


Eircom was privatised in 1999 and has since been taken over by two sets of Barbarians at the Gate. In 2001 the Valentia Consortium, led by the black knight Anthony O’Reilly, took over. The consortium consisted of Goldman Sachs (recently cited in the US Congress for short-changing its clients), an investment bank, Warburg Pincus, and Providence Equity. They sold out in March 2004.
     In 2006 Babcock and Brown Capital took over. The share register of this company consists of hedge funds. These funds manage money for wealthy individuals.
     In 2009 Singapore Technologies Telemedia took over. It got the company for €130 million (the value of Eircom now). It is too early to say how STT will perform.
     The Valentia bid and the Babcock and Brown bid were leveraged buy-outs. The buyers put up very little of the money themselves but borrowed the rest—possibly 90 per of the total. So Valentia borrowed up to €3 billion to finance its deal. Then this became the debt of Eircom—and the company had to pay interest on the debt and pay it back.
     These owners wanted a high return on their investments. That was the priority.
     These venture capitalists pushed to cut costs and employment. Cash earned from customers is used to pay debt rather than for investment.
     So Ireland now lags behind in broadband and in fibre optics, while the venture capitalists move to fresh pastures to wreak their havoc on other businesses.

Examination of effect of leverage on returns

Company value€3,000 million
Shares€300 million
Debt€2,700 million
Interest rate on debt10%
Profit€400 million
Interest€270 million
(10% of €2,700 million)
Profit available for shareholders€130 million
Return to shareholders (barbarians)€130 million ÷ €300 million × 100% = 43.3%
[KC]
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