Vodafone shares below `threshold'

Vodafone shares have fallen below the critical threshold which allows Eircom to walk away from the sale of Eircell. Barring a last minute rally, the average price of Vodafone shares will be below £2.20 sterling during the 10 days leading up to Friday's shareholder meeting to set the sale in motion by splitting Eircell from Eircom. Before the meeting at The Point in Dublin on Friday, the Eircom Board will convene to review the Vodafone share price prior to giving its final recommendation to shareholders. The board is still expected to recommend the offer despite the fall in Vodafone shares, which has seen the value of the deal shrink from #4.5 billion to #3.3 billion.

The chairman, Mr Ray MacSharry, is expected to justify going ahead with the deal on the basis that Vodafone has not fallen relative to its peers. His job will be made harder by Vodafone's failure to stay above the £2.20 sterling level.

The threshold was set last December when Vodafone shares were trading at £2.45 sterling. It represented a theoretical floor for the value of Eircell at which Eircom could back out without incurring penalties.

The unexpected fall in Vodafone has significantly eroded the value of the deal from the perspective of small shareholders in Eircom. Vodafone shares closed at 197.25p sterling last night. Under the terms of last December's deal Eircom shareholders will receive 0.9478 of a Vodafone share for every two shares in the demerged Eircell.

Shareholders will receive one Eircell share for every Eircom share they hold, meaning that the deal is worth #1.51 per Eircom share as of last night. This compares with #1.84 cents when the deal was agreed.

The fall in Vodafone has been attributed to weakness in the telecom sector generally, but a number of stock specific factors have also come into play. The group's shares were hit last week when it announced the issue of 1.8 billion new shares to part fund the £5.8 billion sterling acquisition of a number of mobile assets from British Telecom. These included stakes in Japan Telecom and J-Phone in Japan and Airtel in Spain.

The group plans to issue another one billion shares to fulfil the Eircell transaction, which is due to complete early next week. Although the new issue is expected it will act as a brake on the shares after the deal is done.

The board of the Eircom Employee Share Ownership Plan Trustee will also meet ahead of the shareholder meeting to decide whether to support the sale. The trust holds 14.9 per cent of the company on behalf of staff and has balloted all its beneficiaries on the deal.

The Communication Workers Union, which has three of the seven seats on the ESOT board, has recommended that its members accept the deal. Comsource, the Dutch-Swedish consortium which owns 35 percent of Eircom, also has a break agreement built into its irrevocable undertaking to support the deal. It only comes into play if Vodafone's share prices in the 10 days leading up to the meeting falls below £1.95 sterling sterling. Under these circumstances Comsource can renege on the undertaking without any financial penalty.