Babcock & Brown can block rival Eircom bid

Babcock & Brown Capital has increased its stake in Eircom past the level at which it can block a rival bid, with a total expenditure of some €470 million on the stock in advance of a bid that might value the former State telco at €2.4 billion.

Eircom said last evening that the Australian investment fund had acquired 21.26 per cent of its stock, bringing its holding very close to the symbolic 21.5 per cent held by the worker-controlled Employee Share Ownership Trust (ESOT).

The holding means that Babcock & Brown, like the trust, can block any other bid for Eircom because without its support no other bidder can cross the 80 per cent threshold after which they can compulsorily acquire the remaining shares in a company.

The Australians are already courting the trust, although contacts so far have been confined to corporate advisers. One of Babcock & Brown's executive directors, Robert Topfer, said last week that its "friendly" approach was specifically tailored to meet the trust's interests.

Traders in Dublin believe the Australians are unlikely to stop stake-building until they accumulate 29.9 per cent, just below the level at which a mandatory bid would be required.

The Australians are believed to have been back in the market for the telco's stock yesterday. More than 27 million Eircom shares changed hands, the bulk of them in London. This followed a much quieter session for the stock on Thursday.

Babcock & Brown had 19.77 per cent of the company before trading began in the morning and further stock changed hands after the declaration at around 4.30pm of the 21.26 per cent stake.

As corporate finance advisers to both sides prepare for formal discussions next week, the telco's stock closed one cent higher at €2.21 in Dublin last night.

With a bid premium already built into the stock's price, which fell to around €1.90 last November after Swisscom abandoned its approach for Eircom, the share-buying makes it increasingly likely that the Australians will mount a formal bid. Failure to do so would trigger a slump in the share price, leaving the fund with heavy losses.

With the stock trading in the €2.20-€2.21 range for the past three days, Babcock & Brown is estimated to have spent at least €94.85 million in the past number of days, increasing its stake from its previously declared holding of 18 per cent. The 18 per cent was built up at a cost of €375 million, so the fund's total expenditure so far is estimated to be in the region of €470 million.

Traders say that Eircom's board is likely to do business with the fund, even though any offer would be well below the levels mooted by Swisscom before the Swiss government blocked its approach. The Swiss were willing to pay about €2.42 per Eircom share.

The Australians suggested that they might pay a little above €2.20 per share. Traders say the market expects a formal bid in the region of €2.30 per share.