THE sale of a stake in Telecom Eireann threatened or a long time to become a disaster for the Government and the Telecommunications Minister, Michael Lowry.
In what had taken on the appearance of a slow bicycle race, the news was dominated for months on end, not by who was going to win, but by who was the latest to "fall off", and abandon the race. It looked as if the decision by a previous government to turn down a bid from Cable & Wireless might come back to haunt the current administration.
Fortunately for the Government and for the company - a deal has finally been struck, and with a credible partner. KPN and Telia are the Dutch and Swedish national telephone companies and part of a wider consortium of European telephone companies known as Unisource.
Crucially, Telecom Eireann is getting access to a global telecommunications network through a link up between Unisource and AT&T, the US giant. While this deal has still to be approved by the European Commission, Government sources are confident that it will get the go ahead.
The structure of the deal appears complex, but in essence it is simple enough and designed to meet the needs of both sides. KPN/Telia was loath to pay a lot of money up front, but was keen to conclude the deal.
The Government and Telecom Eireann, on the other hand, wanted the partnership deal, but knew they ran the risk of selling out too cheaply and too soon. The problem they faced was that in a few years' time a restructured Telecom could be worth a lot more than its current value.
The needs of both sides were met through a staggered deal. KPN/Telia is taking an immediate 20 per cent stake, for which it is paying £183 million in cash. If the company performs well over the next few years, then KPN/Telia will pay more to the Government in three years' time for this 20 per cent stake.
The exact formula for working this out is not disclosed. But, once KPN/Telia gets a sufficient initial return on its investment, then 60 per cent of the additional benefits will go to the Government and 40 per cent to the new partners.
KPN/Telia also has an option to buy a further 15 per cent of Telecom over the next three years. A similar formula applies to this purchase. The base price is £200 million, but if the value of the stake rises above this then the Government will get an additional 60 per cent of the benefit.
This is the Government's way of cashing in on what it hopes will be the improved performance of the company over the next few years. It is also, of course, a way for the investing consortium to hedge its bets. There is no obligation on it to take up the option of the additional 15 per cent.
Also it appears that KPN/Telia will, if they wish, be able to sell on a small amount of their shareholding to institutional investors such as pension funds in a few years' time. After an unspecified number of years - believed to be more than three - the new partners will also, of course, be able to sell all their shares, if they wish.
There are various complex mechanisms which probably ensure that the Government would get first refusal if this were to happen, and the technical co operation agreements would remain in place for at least 10 years.
TELECOM'S management has been saying for some time that a strategic alliance was desirable, but not essential. However, if an alliance had not been finalised the company would have faced significant difficulties in restructuring its finances, meeting new competition in the home market and expanding in the fast growth areas of mobile telephony and cable television.
One thing Telecom needs is cash. The company will get a total of £220 million including the bulk of the initial £180 million - which will take a large chunk out of its debt of almost £600 million.
Lower debt, in turn, will increase the ability of the company to direct the cash it earns from its business into essential new investment. The rest of the money will go to the Exchequer and be used to improve the position of the company's pension fund.
There has been much political flak about the price. Certainly, a higher level of interest and more money might well have been forthcoming a few years ago, at the time of the initial Cable & Wireless interest. In the meantime, the telecommunications market has moved on and the attention of the big US companies, in particular, has moved to the deregulation of their home market.
However, in the current environment the Government and company negotiators appear to have struck a reasonable deal. The downside is that the upfront cash element is low and if the value of Telecom does not increase - or KPN/Telia do not subscribe for the extra 15 per cent - the Exchequer and the company will be left short.
The advantage of the deal, however, is that, if the strategic alliance works the Exchequer will cash in on the improved performance. There is thus a strong incentive for both partners to make the deal work.
Just as important for Telecom - perhaps more so than the cash - are the strategic agreements struck with KPN/Telia. These cover all areas of its business from mobile telephony to cable TV to new technology and marketing.
Telecom hopes to be able to plug into KPN/Telia's expertise in all areas of its business. For example, Telia has particular expertise in mobile telephony, while both KPN and Telia have gone through the kind of restructuring process on which Telecom is now embarking.
Telecom will also be able to access the expertise and services of its partners in serving major multinational companies based in Ireland with advanced telecommunications requirements. It can also draw on the expertise of its partners in new areas such as multimedia.
The political row may be about the cash arrangements. But the success of the co operation and technology agreements will be the key factor in determining whether the strategic alliance works or not. And this will depend on whether the new partners can jell together and build quickly on Telecom's existing business.
