Babcock & Brown is now likely to bid for Eircom as it is now the telco's biggest shareholder, writes Arthur Beesley, Senior Business Correspondent

Robert Topfer has spent the best part of €500 million building up a 23.6 per cent stake in Eircom for Babcock & Brown, the Australian investment fund. He's not ready to stop just yet and says he will do nothing less than transform the Irish telecoms market if he gets his way.

Ten days have passed since the Australians made their initial approach for the former State telco, but there's still a long way to go in the takeover process. While Babcock & Brown surfaced as a big shareholder in Eircom in October, Topfer says the fund first looked at the company last April. "The first day we ever took a look at it 'I said forget it, it's never going to happen'."

Quite a lot has happened since then, not least Swisscom's abortive approach for Eircom last November. A declaration by the Australians yesterday that they are now Eircom's biggest shareholder only serves to increase the likelihood of a formal bid.

The shape of any bid very much depends on Babcock's dialogue with the worker-controlled Employee Share Ownership Trust (Esot), which owns 21.5 per cent in Eircom and whose support Topfer will need to execute a deal.

It goes without saying that this particular straight-talking and highly confident Aussie is attracted by the prospects for Ireland's economic growth and the potential to grow a phone business whose broadband and recently-acquired mobile units are playing catch-up.

But while Topfer may not be ready yet to reveal his plans for the Irish group or the Esot, he insists his intentions are good. More than that, he wants to dispel suggestions that a fourth change of ownership since 1999 will see Eircom's network run into the ground before the Australians follow the other previous owners by selling off greatly diminished assets.

In Topfer's account, nothing could be further from the truth. Not only would a takeover be good for Eircom, it would be good for Ireland too as it would open the wholesale telecoms market to real competition for the first time. By turns, this would incentivise Babcock & Brown to invest in the network.

If that seems like the very opposite of the doomsday scenario, Topfer says a deal has the potential to satisfy the the interests of consumers, shareholders, staff, the Government and ComReg, the telecoms regulator. Long though that list is and varied though the interests are, he says it is entirely plausible that each group can be satisfied.

"The only basis on which you could come as a third party to that sort of position and believe you ever had any chance of winning is if you actually believe in the product you are selling... I can't actually understand what the commentators are trying to say. They're trying to say there's nothing left in there and yet these guys aren't going to invest in the future. If that's the case then we'd have bought a dud investment. We wouldn't do that. The reality is we've said we want to invest in the future."

A specialist in structured and corporate finance, Topfer says Babcock & Brown could buy Eircom and find ways of running the business effectively without changing its structure as a vertically integrated group. In such a scenario, there would be no formal division between the wholesale part of Eircom, which runs the phone network, and the retail element that sells phone services to homes and business.

Babcock & Brown would manage the investment as a private equity project and maintain Eircom's current capital expenditure programme, which, he says, envisages expenditure of some €1 billion over five years.

"Everybody in the community in Ireland would say that Valentia had done a great job of stabilising the business but that the business isn't currently investing to the required amount or hasn't historically invested to the required amount to keep up with the potential for growth.

"The company has put out its own view about how much capex it's going to spend and any analysis we would do of that business as a typical private equity-type deal includes that amount of capex."

Still, Topfer says the "rather more sensible" alternative is to separate the wholesale from the retail and treat the wholesale as a piece of infrastructure akin to a rail or electricity network or a water system. Thus the network would be run by Babcock & Brown's infrastructure funds, which manages billions of Australian dollars for the continent's booming pension funds. The retail arm would be run by the fund's corporate finance arm.

Australian pension funds are cash-rich thanks to a compulsory scheme introduced in 1996 that has obliged all workers to divert 9 per cent of their pay into retirement plans. Topfer says the investment requirements of such funds are wholly different to those of private equity funds, which seek a specific return in a set timeframe and which tailor capital expenditure and operating costs to achieve their objectives.

"These are long-term holds forever. We have no intention of selling any of these because the people who invest in them have said 'we want long-run returns forever not short-run returns'. We're not looking for tomorrow's dollar. We're here for dollars for the next 100 years," he says.

Just as it would not be in a fund's interests to run down the network, there would be every reason to invest heavily in the infrastructure. "The underlying growth around the business is there. It's clearly re-entering mobile and is underpenetrated in broadband so it is market growth going forward," he says.

"We think that there is an inflection point in the telco industry going into next-generation networks and I think that telco businesses will actually come out the other side of that much stronger."

He says there are clear advantages here for ComReg, which represents the interests of consumers. A wholesale company, whose board and management would be completely separate from the retailer, would offer transparent pricing and equal access to the network for all.

But for this to work, the objective of opening the local loop that embraces the "last mile" of the network would have to be dropped. Topfer agrees that that would involve a change of policy, but insists that this is not a case of an Australian flying into Dublin from London to dictate policy to the Government.

Rather, he says the solution is the most sensible. "It depends whether it's a good thing for Ireland. No-one's telling anyone to do anything," he says.

"The regulator is sitting in a position where it's currently fighting with Eircom, constantly and losing... The solution for the regulator is to say 'let's accept that there isn't going to be any network competition and that the competition is going to be at the retail level'."

The advantage for the Government would lie in the withdrawal from the loss-making Metropolitan Area Networks scheme, which was designed to compensate for under-investment by Eircom. "We expect nobody's going to invest in networking because we're going to do it."

Topfer says such a plan would appeal to Eircom's staff, because it would protect employment in the network. They get a utility asset that is perfect in the sense that jobs are always going to be there. Everybody acknowledges that a utility is always going to be there. There's not a lot of downside for the worker in that."

For all that, he appears to acknowledge that staff on the retail side would be vulnerable in the drive to create efficiencies in a newly competitive industry. "There is a downside for a worker in the retail side of the business, that's possible."

Babcock & Brown is here for the long haul. If its next priority is to convince the Esot, Topfer believes he has found the solution to the logjam in Irish telecoms. He insists that a deal would not have to be built around a breakup of Eircom, but it is clear where his preference lies.