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February 21, 2006 7:11 pm

Eircom stock boosted by Babcock & Brown approach

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Shares in Eircom rose on Tuesday as the Irish telecoms company confirmed it had received a bid approach from Babcock & Brown Capital, the Australian investment fund that, together with its banking parent, owns 12.5 per cent of Eircom.

The shares jumped from €2.16 to €2.27 before falling back to close at €2.20. Brokers said investors were taking profits, sceptical of whether Babcock & Brown would be able to agree terms.

Babcock & Brown’s move follows a bid approach from Swisscom in November, which pushed Eircom’s shares as high as €2.40. Talks with Swisscom collapsed when the Swiss government blocked the deal.

Swisscom was reportedly ready to pay €2.42 a share for the Irish group.

However, brokers say there are none of the industrial synergies available to Babcock & Brown to take out costs. Moreover, Eircom is highly leveraged, with debts standing at €1.95bn ($2.32bn) compared with market capitalisation of €2.4bn.

Stewart Draper, head of research at Dolmen Securities, said: “I can’t see anyone paying in excess of €2.30.”

He said the shares were already trading at about 6.8 times 2006 earnings before interest, tax, depreciation and amortisation. This means that, even at the current price, it looks more expensive than other recent European takeovers.

On Thursday, Eircom reported disappointing third-quarter results, prompting brokers to downgrade full year forecasts.

However, the company said Meteor, the mobile arm it acquired from Western Wireless in August for €242m, was performing well, with market share at 14 per cent, well on track to achieving its target of 20 per cent within 3 years. Eircom controls 79 per cent of the Irish fixed line market.

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