Babcock & Brown must clear a number of hurdles if it is to succeed in becoming the fourth owner of Eircom since it was sold off by the Government in 1999, writes Jane O'Sullivan, Markets Correspondent

Hammering out an acceptable sale price and securing shareholder approval are among the key challenges facing the Australian group if it is to take over the Irish telecoms group.

Although Swisscom had been prepared to pay more than €2.40 per share for Eircom, the general feeling in the market is that any bid from Babcock & Brown is likely to be priced at less than €2.30 per share and probably closer to €2.25. At that level, the company would be valued at €2.4 billion.

Although Eircom has been described as a fixed-line, broadband and mobile "triple play" in a strong economy, the company faces growing competition in its fixed-line business, a fact underlined in weaker-than-expected earnings figures issued last week.

"Any formal offer over €2.25 would be pushing the boat out," one dealer said yesterday.

More than 90 million Eircom shares changed hands in the Dublin and London stock markets after Eircom confirmed it had received a preliminary approach from Babcock & Brown, the company's second largest shareholder, with a 14 per cent stake.

Despite the activity, dealers said the share price reaction was relatively muted with the shares closing just four cent, or 1.85 per cent, higher, at €2.20 as dealers took the view that any bid would not be much above that level in the absence of a rival bidder.

"The massive net debt position of the company may limit the ability of any bidder to pay much of a premium above the current share price," said Stuart Draper of Dolmen Stockbrokers, pointing to Eircom's debt of €1.95 billion. "I don't see much of a premium on €2.20," he added.

Market sources also noted that, as a financial buyer, Babcock & Brown would not be in a position to extract the same savings from a takeover as an industry player like Swisscom. Recent deals in the telecoms sector have also been done at lower multiples than that currently attaching to Eircom, they noted.

The emergence of a rival bidder could, of course, drive the price higher but few observers are convinced this will happen.

"The Swisscom offer was out there for quite a while and nobody was dashing in to counterbid," one fund manager noted yesterday.

Price aside, Babcock & Brown's plans for Eircom may also prove critical in securing the support of the ESOP (Employee Share Ownership Plan), which owns 21.6 per cent of the company and whose support is vital to any bidder.

There has been speculation that the Australian group might split Eircom in two, separating the firm's network operations from the rest of the business, including the recently-acquired Meteor mobile phone business.

Additionally, there is uncertainty as to whether a bid lacking any involvement from an industry player would be acceptable to the ESOP, which is keen to secure the long-term future of the company for its members.

"This is the start of a process," one source close to the company said yesterday.