KPN is set to emerge as the biggest single shareholder in Telecom Eireann after the public share offering in June.

By buying the shares currently held by Telia and exercising the option to buy further shares, it will end up with 35 per cent of Telecom's equity after the flotation.

KPN of Holland and Telia of Sweden bought 20 per cent of Telecom in 1997.

They have an option under the strategic alliance deal to buy a further 15 per cent which, when exercised, will net the Government some £530 million.

It is understood that intense negotiations are under way regarding the purchase of this stake.

The prospectus for the flotation must be filed with the Securities & Exchange Commission in the US by the end of next week and must contain shareholding details.

The alliance partners - KPN and Telia - bought 20 per cent of Telecom for £183 million two years ago and can buy another 15 per cent for £200 million, plus a percentage of the increase in the value of the company since they formed the alliance.

Telia and Telenor have merged their operations in Norway and Sweden.

This represents a potential conflict of interest because Telenor owns 45 per cent of Esat Digifone, the second mobile operator (soon to increase to 49 per cent), while Telecom owns Eircell, the State mobile operator.

Although no formal announcement has been made, it is widely expected Telia will sell its 8 per cent stake to KPN.

In addition, it will end up owning the extra 15 per cent to which the alliance partners are entitled.

The prospectus is expected to say that Comsource - the vehicle set up by KPN and Telia to invest in Telecom - will hold 35 per cent of the shares through the flotation and for at least six months thereafter, leaving the two companies to agree between themselves on the terms of which KPN will purchase the Telia stake.

A KPN spokesman insisted last night that no decision had been made on whether KPN would take up its options.

However, it is understood that it will do so and will hold the stake in Comsource. As part of the public offering conditions, Comsource is expected to be locked into holding the stake for at least six months.

Current talks between Telecom, the Government, KPN and Telia, centre on the 15 per cent the alliance partners have an option on buying.

The complicated formula means that Comsource pays £200 million plus 60 per cent of the increase in the value of the 15 per cent stake in Telecom Eireann since the alliance partners joined.

It is generally reckoned that Telecom's value is now about £5 billion.

This means that KPN will be paying £530 million for the stake - money which goes straight to the Government.

"Although criticised at the time, in hindsight it should be seen as a good deal because it included a clause allowing for the Government to benefit from increase in the value of the company," said one source.

Following the flotation, the Government will hold 15.1 per cent of the company, KPN will have 35 per cent, the employees 14.9 per cent, and institutions and private investors will have 35 per cent.

The Government's advisers will be paid about £40 million for their work on the flotation.

The rest of the money will go to the Exchequer and it is understood about £800 million of this will be paid into a Telecom Eireann pension fund for pension obligations incurred in the company's separation from the postal operations.