Babcock & Brown, the Australian fund leading the €1.36 billion bid for Eircom, has opened the way to introduce new equity investors to take a 5 per cent stake in the telco when the transaction is executed in August.

The inclusion of the unnamed investors is mentioned in a legal scheme of arrangement for the takeover which was published yesterday. Their arrival will reduce the cost of the transaction to Babcock & Brown, as it will own 60 per cent of Eircom after the deal while Eircom's employee share ownership trust (Esot) will own 35 per cent.

Eircom's independent directors and its outgoing chairman Sir Anthony O'Reilly unanimously recommended the deal. But in a letter to shareholders that forms part of the scheme of arrangement, they warn that a rise in Eircom's debt to €3.8 billion from €2 billion after the deal has the potential to place limits on the telco's operations.

"Following completion of the scheme, the Eircom group will have a much increased level of indebtedness and may be subject to financial and other restrictions under its debt financing arrangements that may impact on the company's operating and financial flexibility."

While some observers believe the increase in debt will reduce scope for capital investment in Eircom's network, the telco's incoming chairman Pierre Danon said this month that the new owners plan to increase capital investment. In the documents published yesterday, the Babcock & Brown bid vehicle BCM Holdings Ireland said that a separation of Eircom's retail arm from its network division "might allow the network business to raise capital more easily to finance the broadband, next-generation network and IPTV rollout".

The bid vehicle did not anticipate such a separation but said it would consider such a request from the relevant authorities in Ireland "provided an appropriate complementary regulatory regime is implemented" and the interests of other stakeholders were protected.

The Esot is using its existing 20 per cent share of Eircom to finance its part of the deal. However, the scheme documents indicate that the trust has taken out €27.5 million in term loans with Ulster Bank and €129 million in bridging finance with the bank to facilitate the transaction.

The documents also set out an indicative timetable for the transaction, which is scheduled to close on August 18th. Shareholders will be asked at a court meeting and an extraordinary general meeting in Portmarnock on July 26th to sanction the deal and Eircom's delisting from the stock exchange. Sanction is seen as a formality, given that the Australians and the Esot already hold more than 50 per cent of Eircom between them.