Eircom rattled by fall in Vodafone share price

The sale of Eircell to Vodafone faced a fresh obstacle last night after the British mobile group's shares fell below £2 sterling. Sources close to Eircom said that company management was seriously concerned at the latest fall, blamed on fears that Vodafone's plans to sell Italian telecoms group Infostrada are on the verge of collapse.

The source said Eircom will be nervously watching for signs of a rally in Vodafone shares in the coming days as they prepare to write to their 500,000 shareholders with details of the Eircell transaction. The steady fall in Vodafone shares from the £2.45 level at which the deal was struck last December has reduced the cash value of the deal to shareholders from €1.84 per Eircom share to €1.47.

The deal requires the approval of shareholders at an extraordinary general meeting, but Eircom can walk away from the transaction before the meeting without incurring any penalties as long as the share price remains below £2.20.

Abandoning the sale will become more difficult once the documentation is issued, according to Eircom insiders. Yesterday's fall rattled Eircom because the problem was specific to Vodafone rather than due to the general weakness of the sector which has underlain most of the recent decline. Vodafone dropped more than 4 per cent to a low of £1.9325 sterling, its weakest since January 1999, as the market reacted to last Friday's warning that demands by Italy's competition authority could derail the sale of Infostrada to electricity company Enel. The share later rallied slightly to close at £1.98 sterling.

Mr Mark James, telecoms analyst at Nomura, said the failure of the €11 billion deal with Infostrada would be "extremely negative" for Vodafone.

The collapse of the deal would push up Vodafone's gearing to 10 per cent from 7 per cent, still low compared with 50 per cent for the rest of the sector.

A Vodafone spokesman said it was sticking to its debt target for now of £10 billion by the end of March. It expects the competition probe to end on March 11th, although the Infostrada sale is supposed to be completed on February 28th.

The collapse in telecoms valuations has scuppered its flotations of Arcor in Germany, Verizon Wireless in the United States and Vodafone Pacific in Australia.

The Italian competition authorities are concerned about Enel's ability to cross-sell electricity and telecoms services and lock customers into bundled deals.

It might demand Enel give up as much as 25 per cent of its power capacity as a condition for clearing the deal, which Enel said yesterday would cost it around $2.6 billion a year in lost income. Enel is expected to call off the deal if the condition is enforced. (Additional reporting by Reuters)