BABCOCK & Brown Capital is to buy more Eircom shares this week in a bid to increase its stake in the telco to 29.9%, the last point before a mandatory bid would be triggered.

Robert Topfer, the Australian investment group’s executive director, is believed to have mandated its advisers to acquire shares at up to €2.20 this week.

Babcock & Brown says it has built up sufficient credit lines to fund a takeover itself, but sources close to the fund say that it is continuing to talk to private equity houses that have expressed interest in co- investing in a takeover.

However, the need to invest up to €200m a year in the network means private equity groups could be excluded. Babcock has indicated that it is willing to invest heavily in Eircom’s network, a commitment that could garner government and regulatory backing.

“There’s no point in going into a deal which is so grossly leveraged that Eircom will not be able to continue to upgrade its network or develop its business,” said a source close to the fund. “That strategy would be very short-sighted.”

Babcock is expected to meet with Eircom’s advisers, Morgan Stanley and Goodbody Stockbrokers, within the next two weeks.

While Babcock & Brown initially signalled its takeover ambitions to the employee share ownership plan’s (Esop) advisers, ABN Amro Rothschild, it is understood it will not contact the trustees until after meeting Eicom’s advisers.

The Esop will not be interested in a cash offer, as this would lead to significant tax liabilities for its members.

The Esop’s demands are likely to be different from those made in the Sir Anthony O’Reilly-led Valentia take-private in 2001. “The last time round, (Esop) was interested in getting the biggest chunk of (ordinary shares) possible. With much more debt likely to be involved this time round, (Esop) would be more interested in less risky paper. It will want more preference shares,” a source said.

Valentia took on €2.4 billion of debt in 2001 to buy Eircom. A leveraged Babcock & Brown deal is seen as increasing Eircom’s debt mountain to in excess of €3 billion, about 50% higher than its current level.

The Esop’s 144.6m preference shares — which convert into ordinary stock at a rate of almost two for one — equate to almost 7% of common stock.

Although Babcock & Brown has hinted it has a plan that would be palatable to Esop, the plan’s trustees have yet to give it the once over. Any changes to the structure of the Esop’s shareholding in Eircom will have to be cleared by tax experts and the Revenue Commissioners.

Babcock & Brown has been approached by a number of Irish corporate financiers seeking to advise on the deal. These include Davy and NCB Stockbrokers. Sources indicated, however, that it will continue to retain the services of JP Morgan and Merrill Lynch for the time being.

Frantic buying last week saw Babcock & Brown increase its stake in Eircom from 12.5% to almost match the 21.6% stake held by the Esop.

Eircom’s shares ended the week up 5% at €2.21.