David McCourt’s Twitter profile describes the Irish-American entrepreneur as a telecoms revolutionary and author of bestseller Total Rethink. Amazon ranks the title outside its top 3,700 books on entrepreneurship. Perhaps a rethink is needed on the term “bestseller”.
In the scheme of things. McCourt’s literary prowess matters not a jot. As the driving force behind National Broadband Ireland (NBI), his ability to deliver broadband to rural Ireland is pertinent, and under scrutiny. Its target for connections to the end of January has been slashed from 116,000 to just 60,000. Up to last month, only 3,335 connections had been made.
The corporate structure and financing of NBI are under the microscope. They were laid bare in forensic detail last week in The Currency, an online business publication, prompting questions in the Dail. On Friday, NBI confirmed earlier reports that it has hired boutique investment bank PJT to explore “options to support its long-term vision” and to establish a long-term capital structure that “recognises the maturity of the project”.
NBI, which signed a contract with the government to deliver broadband to 335,000 rural premises, is owned by four parties. These are Oak Hill Advisors (OHA), a US hedge fund; Granahan McCourt (GMC), McCourt’s investment vehicle; Tetrad, which is controlled by the family of the late US billionaire Walter Scott; and Twin Point Capital, a specialist telecom private equity firm. OHA controls 49 per cent of NBI, while the other shareholders together hold the remaining 51 per cent. It appears management may earn up to 5 per cent of the company depending on its performance.
Under the deal struck with the government, the investors agreed to invest €223 million in NBI. This is loss-absorbing, risk capital in the €3 billion project. Accounts just filed for Metallah, NBI’s immediate parent, show that the vast bulk of its investment is being made through loan stock and not equity.
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The split is €221 million of loans and just €2 million of equity. Tp date OHA has provided most of the €100 million loans which carry an interest rate of 12 per cent and are repayable in 2024.
Such a financing structure, with wafer-thin equity and a large amount of shareholder debt, is common in private equity deals, particularly when routed through Luxembourg, as is the case with NBI. Loan capital prevents investors getting caught in a so-called cash trap, where a company does not have the distributable reserves to pay dividends or redeem equity. NBI, where the investment is upfront and return far in the future, is a cash trap in waiting.
Any change of ownership at NBI requires written consent from the minister for communications.
With the appointment of PJT, the most likely aim is that long-term infrastructure funds will replace short-term backer OHA as the main funder of NBI, and at a third of the interest cost.
OHA will exit with a very sizeable return, while NBI gets its “long-term capital”.
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An irony here is that McCourt made his original run at the national broadband plan through Enet, a fibre network provider which is backed by infrastructure funds. However, McCourt sold out of Enet in 2019 and took the NBI project with him, eliciting the support of hedge fund Oak Hill to make his bid.
Accounts for Metallah reveal that the same bid cost €33 million in fees paid to NBI Bidco LLC, a McCourt company. These covered costs incurred in the tender, bid, negotiation and successful conclusion of the 25-year project agreement.
Cost recovery is standard, even if the number here is very large. What politicians are now asking is whether the recovery of bid costs or Oakhill's expensive capital will hinder NBI’s rural broadband delivery, which is staggering to get to its feet. In the context of a €3 billion rollout, NBI will argue not.
Instead, McCourt has been publicly chiding Eir, which itself is selling nearly half of its fibre network, most likely to infrastructure funds. The deal could yield €1.6-2 billion for the company and its owners, the French billionaire Xavier Niel and hedge funds Anchorage and Davidson Kempner. Since their buyout of the telco in 2018, Eir has distributed a massive €930 million to the same shareholders.
In the Irish Independent, McCourt called for the proceeds to be put into the Eir network, and presumably not fund more distributions to its owners. He wrote: “Our 1,800 hardworking men and women are often working in decrepit manholes, crushed ducts and sagging cables from crooked poles. The [Eir] network needs fixing.”
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He added: “I’ve seen first-hand what that underinvestment looks like. Now that Eir has an owner [Niel] who says he’ll invest for the long term, we should applaud this move.”
It was pointed prose, yet as one industry observer remarked, at least Niel and Eir are actually laying fibre.