Competition clause to run for three years

Vodafone may seek to recoup up to €500 million of the €3.6 billion Eircell purchase price if Eircom breaks its agreement not to re-enter the mobile market for three years. The British group has insisted that Eircom keep its net assets above €500 million for two years after the sale and above €200 million for a further four years.

The conditions are part of the collateral deed, or non-compete agreement, entered into by Eircom and Vodafone.

The restriction ensures that Eircom will have sufficient assets to make it worth Vodafone pursuing the Irish group should it break the agreement. Although the company currently has net assets of around €1.5 billion, the de-merger document warns that "this obligation may restrict its [Eircom's] ability to undertake certain types of corporate activity which . . . may adversely affect Eircom's business, financial and/or operating performance".

Although Eircom has given a general commitment not to compete with Eircell after its sale to Vodafone, the complex agreement allows Eircom back into the market in a number of limited circumstances.

The most significant caveat is in the case of Eircom being taken over by a company which owns or has the rights to a second generation or third generation mobile licence.

The clause may become very relevant in the case of a takeover of Eircom by eIsland, the consortium headed up by businessman Mr Denis O'Brien who is involved in a bid for a 3G mobile licence. Mr O'Brien is expected to decide whether to proceed with his bid for Eircom once he has studied the Eircom and Vodafone documents.

Eircom also retains the right to use 100 of the mast sites being sold to Vodafone as part of the deal once the three-year non-compete period is up. In addition, the company retains ownership of the 1,100 mast and infrastructure sites used by Eircell, which will continue to use them under licence. Details of the non-compete agreement are disclosed in the circular sent to shareholders by Eircom.

The main restriction is a three-year ban on carrying out any business that competes with Eircell's current business - which crucially does not include 3G, the next generation of mobile services.

Eircom cannot solicit any of Eircell's major customers, bid for a mobile licence or acquire a company that has a mobile licence.

Many of the restrictions do not apply if Eircom is taken over by a company that already has a mobile business.

In any case, Eircom will be allowed re-sell Eircell services to its customers, provided it does not do business with more than 10 per cent of Eircell's current customers.