EIRCOM’S MANAGEMENT has predicted that the company’s earnings could fall by up to 20 per cent over the next two years due to competitive pressures, customer losses and lower average mobile spend by subscribers.

This emerged yesterday as the company began talks with a committee representing first lien senior lenders.

Eircom’s management presented their business plan with the lenders, who are owed €3.65 billion.

Sources familiar with the plan told The Irish Times that it includes a forecast that Eircom’s Ebitda (earnings before interest, tax, depreciation and amortisation) will decline to about €550 million in the 12 months to the end of June 2012 and to about €510 million in the following year.

Eircom posted Ebitda of €669 million in the year to the end of June 2010, the latest year for which accounts are available.

Its 2011 results will be released in late August and are expected to show Ebitda for the year of about €640 million.

The business plan is also believed to have indicated that the company would invest about €400 million on the rollout of a fibre network over the five-year period to provide highspeed broadband.

The Ebitda figure is important to both Eircom and its shareholders, and the group of lenders, in the context of establishing a valuation for the company.

This in turn would suggest the level of debt that Eircom could bear and indicate the potential haircut that lenders might have to take.

Given that a multiple of between four and five times is likely to be attributed to Eircom, this would value the company at between €2 billion and €2.75 billion based on the Ebitda figures for the next two years.

Sources indicated yesterday that a valuation was likely to be at the lower end of that scale.

This would indicate that Eircom and its shareholders could seek to reduce the debt obligation to senior lenders by up to $1.6 billion, although a lower figure is more likely.

The co-ordinating committee is likely to balk at this and it is understood that some form of debt-for-equity swap could form part of the negotiations.

The talks kicked off yesterday and are at a preliminary stage. Sources have indicated that they could last for some months and there will be many moving parts.

Eircom has yet to breach its financial covenants but this is expected to happen in late August when its full-year results are released.

Eircom’s shareholders – Singapore-based STT and the employee share Esot – could provide an so-called “equity cure” by injecting capital into the business.

This would avoid a default. But sources have indicated that such a move is unlikely in the absence of a deal on the outstanding debt.

Instead, some form of debt writedown is likely to be agreed. In parallel with this, the existing shareholders could also inject capital into the business, possibly €300 million or more.

Eircom yesterday said that Gleacher Shacklock would be its sole representative in its talks with the committee of lenders.

This role had previously been shared with JP Morgan.

In a statement yesterday, Eircom said its projection for the 2011/2012 financial year reflected the “continuing effect of fixed line losses, reductions in mobile termination rates, increased customer acquisition costs, and reduction in business wholesale and retail margins resulting from the poor economic outlook, and continued competitive and regulatory pressures”.

This would only be “partially offset” by a fixed-line price rise and reductions in labour costs.