The Esat Telecom group has been dubbed "an underperforming stock for most of 1999", a company facing "increasing competitive pressures" and one which carries "significant degree of financial risk".

Yet Telenor, the Norwegian company which has levelled the criticisms, is prepared to pay $85 (€82.42) per American Depository Share (ADS), for the group, a price which it says is $33 per share above Esat's "intrinsic value". One ADS is equivalent to two ordinary shares.

The term intrinsic value is the sum of the values of Esat's individual operations, which Telenor has adjusted for debt and Esat's minority ownership of Digifone.

So if the company is such a poor prospect, why is Telenor - which currently owns 49.5 per cent of Esat Digifone, the same shareholding held by Esat - prepared to pay so much for the Republic's second-biggest telecoms group?

"We already own 49.5 per cent of Digifone, which is the most valuable part of Esat's business and we got in at a low price," says the managing director of Telenor International, Mr Morten Sorby. "Therefore we can afford to pay a very good price for the balance. It is the key reason why we are able to pay more than [what we think] anybody else would pay."

It is understood that Telenor's initial investment in Digifone three years ago was between £100 million-£150 million.

Mr Sorby remains adamant that $85 per share is an outstanding price for shareholders - despite the fact that the share has been trading at around $92 this week.

Mr Sorby says the volumes are very small - earlier this week, he said, around 100,000 shares per day were being traded. To put it in context, around 400,000 shares equals 1 per cent of Esat.

"I have a deep respect for the market's valuation of companies," he says, "but the volumes being traded are low and I believe it is trading on spec," he says, adding that shareholders always want to achieve a higher price than that being offered.

Esat has confirmed that it has been in talks with several other parties, with a view to getting alternative offers. Mr Sorby says "clearly there is market speculation that there may be a white knight out there.

"I don't know if there is one, but I have problems seeing who it could be."

Despite its "outstanding offer" Telenor has reserved the right to increase its bid again. Its initial bid was $72 per share, a level which was quickly surpassed by the market.

Not surprisingly Esat's board rejects the Telenor analysis of its value (see separate story), saying the Norwegians are trying to buy it on the cheap. Esat also accuses Telenor of not understanding the company's strategic position - it has said Esat's fixed-line business is very vulnerable to competition and says the company has 9,000 corporate clients including blue chip companies such as Intel, Gateway, and Dell.

Esat also says also says that Telenor's motivations for talking down the value of Esat are "transparent" and poses the question: "If Telenor believes Esat faces strategic challenges, why has it such a keen interest in our expertise and assets?"

Some analysts have criticised Telenor for coming in too low. Mr Sorby says the company believed this was the right level to pitch at, that it was a fair price, but now concedes that "it was clear Telenor wasn't going to win it at that price".

Some reports have focused on the pivotal role which Mr Dermot Desmond's investment vehicle International Investment Underwriting (IIU), could play in the event of a white knight launching a counter offer. It holds a 1 per cent stake in Digifone. It appears that IIU could sell its stake to any company not currently involved in the mobile business in the Republic.

Telenor sued IIU when it reduced its 10 per cent stake to 1 per cent, in a row over board representation. Relations are somewhat strained.

Mr Sorby told The Irish Times that Telenor does not believe IIU can sell its stake to just anyone it chooses. "We have good, strong, pre-emption arrangements," he said.

Pre-emption rights usually give the other shareholders first call on the stake which another shareholder is selling.

Asked if it was not a bad move to sue a fellow shareholder, Mr Sorby said it was Telenor policy not to comment on "litigation processes". However, he maintained that in Digifone, Telenor had always worked "in accordance with what we believe is the shareholders agreement and the intentions in the shareholders agreement".

He said that despite the differences between Digifone shareholders - Esat directors have also had differences with Telenor executives - the shareholders and management had created huge value in the company.

Mr Sorby was also reluctant to comment in detail on the breakup of Telenor's merger with Swedish telecoms group Telia. It ended acrimoniously and led to Telenor proceeding alone with the Esat bid. He rejected suggestions that these rows indicate that Telenor is not an easy company to get on with. "The Telia/ Telenor merger was driven by owner considerations rather than management issues," he says. (Telia and Telenor are owned by the Swedish and Norwegian governments.)

Telenor will not categorically say if the revised offer for Esat is a final one because to do so could preclude it from increasing the offer, under takeover rules.

Mr Sorby says that if he was to make "one simple comment" it would be that Telenor has shown what Esat's intrinsic value is and that what it is offering for the mobile business is well above what Esat offered Telenor last year for its Digifone stake. In October Esat offered $700-$800 million to buy out Telenor.

"We are offering $863 million, and a premium [for the mobile stake]. To say that offer is unsatisfactory . . ."

Telenor's revised offer document details why it believes the offer is such a good one for shareholders.

The document also says that the £115 million which Esat paid for PostGem/Ireland Online, as well as other recent Internet deals, indicates that these businesses can be valued at their acquisition price.

The high price paid for PostGem took analysts by surprise. Asked if he considered it a high price, Mr Sorby said "we think that the seller achieved a very good price, but we take the view that there was a competitive process and it reflected what the market was willing to pay".

He also says that shares were issued to An Post at $40.17 per ADS as part of the PostGem deal - less than one month before Telenor's initial offer. He says the increased offer now exceeds this price by 112 per cent. "You can argue that there was no takeover premium in the An Post deal, but $85 is still a very good deal."

Mr Sorby signalled Telenor's determination to remain a shareholder in Digifone, even if Esat receives a counter offer. "We are committed to the Digifone operation," he said. "We think the offer is very attractive and that it will succeed."

Mr Sorby declined to comment on what Telenor would do about Esat's high yielding net debt of $363 million. The document makes much of this debt, saying that if it was subtracted, it would put an intrinsic value of $1.3 billion on Esat, or $58.3 per share. This means that Telenors' current bid premium is 46 per cent.

Mr Sorby said he believed the combined Telenor/Esat group would be "a more flexible and attractive package" to the financial markets.

"I think that cash will be available to the Esat operations in an easier and cheaper way," he said.

He reiterated his belief in Esat's potential to develop under Telenor. "In Scandinavia, penetration in the mobile market is close to 60 per cent, compared to 30 per cent in the Republic," he says.

"There is no reason why the Irish market should not develop like the Scandinavian market and developments in the data communications market will drive the mobile business further on."