Australian investment group Babcock & Brown Capital is said to have built up a stake of at least 20 per cent in Eircom after indicating it was prepared to pay a little above €2.20 per share to take full control of the former State telco, writes Arthur Beesley, Senior Business Correspondent

Such a price implies a valuation approaching €2.4 billion.

As Babcock & Brown brought its stake in Eircom to a level close to the 22 per cent held by the company's Employee Share Ownership Trust (ESOT), one of the Australian group's executive directors said it was expecting a swift response to its "friendly approach" for the telco.

Robert Topfer, executive director of Babcock & Brown, said the proposal was specifically tailored to address the needs of the trust and suggested that Eircom could provide an annual return in excess of 15 per cent to Babcock & Brown. "Our discussions with Eircom have been of a preliminary nature, and we await a formal response from the board of Eircom," he said.

Eircom's directors discussed the preliminary approach from the Australians at a routine board meeting yesterday, but a spokesman declined to comment afterwards on its likely response or on the likelihood of a deal. The company was seen as a willing seller to Swisscom, whose abortive approach late last year valued Eircom at a little above €3.40 per share.

Eircom and its advisers, Morgan Stanley, are likely to examine how Babcock & Brown propose to fund a bid and how it might run a company that operates in what would be a new industry for the group. Eircom has debts of some €2 billion.

Before the market opened in Dublin yesterday, Babcock & Brown said it had spent A$200 million (€123.68 million) on Eircom shares to increase its stake to 18 per cent by the close of business on Tuesday from 12.5 per cent. It made this disclosure overnight, in a statement to the Australian stock exchange.

Such purchases brought to nearly €375 million its total expenditure on Eircom shares, at an average price of €1.96 per share and a maximum of €3.20.

Market sources said the bank continued to buy Eircom shares yesterday. The stock finished the day at €2.21, a cent higher than its close on Tuesday. Some 31 million shares changed hands in Dublin and 20.5 million were traded in London.

Citigroup in London said a formal bid from Babcock & Brown was unlikely to be contested, limiting the premium over Eircom's current share price. While it was "still by no means a formality" that a deal would be done, Citigroup said a deal premium was already factored into the current price.

Goldman Sachs in London said Eircom looked relatively expensive, had more limited "headcount reduction potential" and was showing gross margin weakness in its fixed-line business.

However, Mr Topfer said Eircom's acquisition of mobile firm Meteor gave it growth potential that most incumbent telcos did not have and he noted that the telco was operating in an under-penetrated broadband market.

He said in an Australian media interview that the base fundamentals of the Irish economy were fantastic and added that Eircom's control of the fixed line network was attractive to Babcock & Brown. Noting projections that the boom will continue, he described telecoms as a "GDP business".

The group saw network assets as akin to infrastructure assets, like toll-roads, railways or airports. Noting that network-based competition was unlikely in a small market, he said Babcock & Brown could end up with a very safe regulated infrastructure asset, akin to a water, gas or electricity system.

Mr Topfer was in Dublin yesterday but did not return calls from The Irish Times.

Standard & Poor's said it placed all its ratings on Valentia, in which Eircom's debts reside, on long credit watch with negative implications.