Eircom shares rise sharply as Vodafone deal firms up

Eircom shares have risen sharply in anticipation of the completion before Christmas of the long-awaited sale of Eircell to Vodafone. The shares rose to €3.05 at one stage but closed last night at €2.92, a gain of 4.7 per cent on the day.

The deal - which will value Eircell at around €4.6 billion - could be announced tomorrow or Thursday but sources close to the talks stressed that, if the deadline is missed, it will not necessarily mean the talks are in trouble. One issue that remains to be resolved is the future of the 35 per cent stake held in Eircom by Comsource.

Although the Dutch-Swedish alliance has made it clear it supports the sale of Eircell, it has yet to agree what will happen to its stake in business going forward. The Dutch phone company KPN and its Swedish counterpart Telia acquired their stake in Eircom in 1996 but have being trying to sell out for the last 18 months since Eircom floated. Eircom's board and management have been looking at trying to buy out the Comsource stake in tandem with the Eircell transaction.

Ideally they would like to put plans for a share buy-back to shareholders for approval along with the Eircell deal. However, any attempt to use the proceeds of the Eircell sale to buy out Comsource will be opposed by the alliance itself. The possibility of using funds from other sources to buy out Comsource has also been explored. Eircom could raise in the region €300 million to €400 million for a buy-back, according to industry sources.

Despite this, KPN and Telia are reluctant to agree to be bought out as long as a number of parties are interested buying the business or its assets.

A consortium led by Mr Denis O'Brien has already made a €2.25 billion offer for the group's fixed-line business and a number of other parties are reported to have made approaches. Comsource argues it would be foolish to agree to be bought out now when it is unclear what price Mr O'Brien or other bidders may pay. Another possibility is that Comsource agrees not to sell its Eircom shares for a specific period. Such a "lock up" would confer some stability on the Eircom share price after the Vodafone deal. The knowledge that KPN and Telia want to sell their shares has been a major drag on the share price for most of the year.

KPN has already had talks with a consortium led by businessman Mr Paul Coulson over the sale of its 21 per cent holding. The talks were inconclusive and ended two weeks ago, although their resumption has not been ruled out. Another name linked to a possible bid - Dr Tony O'Reilly - appeared to be ruled out last weekend, when it was reported that he did not have any interest.

A number of legal issues also need to be resolved before the deal can be put to bed. These include agreements between Eircom and Vodafone over the use of shared facilities.