Shares in Eircom lost five per cent yesterday after it emerged that Australian investment fund Babcock & Brown Capital, and its associates, had taken a 12.5 per cent stake in the company.

In the first investment by the fund, which was established last February, Babcock & Brown Capital paid A$350 million (€217 million) for a 10.8 per cent stake, which is understood to have been purchased through British brokers Cazenove and UBS in recent weeks.

Its parent, the Sydney-based investment bank Babcock & Brown, invested a further A$55 million (€34 million) for a 1.7 per cent shareholding, giving the Australian group a 12.5 per cent interest in Eircom at a total cost of A$405 million (€251 million).

However, shares in Eircom lost 12 cent, or 5.4 per cent, to €2.09 amid some disappointment that the recent mystery buyer of the stock had turned out to be an investment fund rather than a trade buyer building up a stake with a view to a takeover.

"It suggests that the imminent possibility of the company being acquired has moved into the background," said Neil Clifford, analyst at Goodbody Stockbrokers.

Babcock & Brown Capital said it viewed the investment "as a strategic shareholding in a company with robust fundamentals and a positive outlook which is not fully recognised by the market at the present time."

It went on to say that it was optimistic about the Irish economy and the benefits accruing to Eircom's business as a result. It also described Eircom's recent acquisition of mobile phone provider Meteor as the "correct strategic move".

"Over time we believe the market will recognise the inherent value in the core network business and will re-rate it in line with other utilities."

Eircom, which is chaired by Sir Anthony O'Reilly, declined to comment on the purchase while the Eircom share ownership programme (Esop), which owns 21 per cent of the company on behalf of staff, had nothing to say either.

But the announcement explains much of the activity in the share price in the run-up to Friday's closing deadline for a €423 million rights issue to fund the Meteor purchase.

Any other significant acquirer of shares as part of the rights issue has until Wednesday to declare their stake.

But many market players believe the 134 million shares acquired by Babcock & Brown should account for the bulk of the recent activity in the company's stock.

Meanwhile, Babcock & Brown's precise intentions toward Eircom remain to be seen. Most analysts see the group as having an eye to the long-term rather than seeking to turn a quick profit.

But whether the investment company is happy to remain a passive investor, sitting back and allowing Eircom management to execute its plans, particularly in the mobile market, or whether it is hoping to become actively involved in a pan-European telecommunications consolidation remains to be seen.

The purchase of the 12.5 per cent Eircom stake is not Babcock & Brown's first involvement in the Republic.

The company, which already has an office in Dublin dealing with aviation leasing, took part in a competition to build a new electricity power station two years ago when it backed the failed bid by the Irish Power Energy consortium.

The Australian group has also been active in Northern Ireland more recently.

Last month, it took a 10.6 per cent stake in East Surrey Holdings, which owns the gas infrastructure network in Northern Ireland and is currently involved in a possible takeover.