The €3.7 billion offer for Jefferson Smurfit Group tabled by Madison Dearborn Partners has shrunk to €3.37 billion as the dollar tumbles and stock markets slump in the wake of the WorldCom collapse. Yesterday, sources close to the deal warned that the impact of the falling dollar on the company's profitability could upset the deal.

The turmoil in the stock market is also expected to have negative consequences for the flotation of C&C, which is scheduled for July 15th. The company last week set a range of €2.60 to €3.60 for its flotation price, already some 30 per cent below expectations. Analysts said yesterday that the actual price was now likely to be towards the lower end of that range.

Just under one-third of the €3.26 per share being offered by Madison Dearborn is accounted for by the value it puts on shares in Smurfit's US associate Smurfit Stone Container Corporation (SSCC) that will be passed on to shareholders.

The figure of €1.11 per Smurfit share used by Madison Dearborn is based on an SSCC share price of $16.68 and an exchange rate of $0.935 to the euro.

With Smurfit Stone shares down at $15 yesterday and the dollar close to parity, the value of the Smurfit Stone stake to shareholders was closer to €0.95 per share. When this is added to the €2.15 that Madison Dearborn has offered for Jefferson Smurfit shares, the value of the offer is nearer €3.10 per share. Shares in the Smurfit group fell almost 3 per cent to €3.08 in Dublin yesterday reflecting the fallout from WorldCom's collapse.

Sources close to the Madison Dearborn offer said yesterday that the real danger lay in the impact on Smurfit's profitability of the tumbling dollar. Any significant reduction in profits could seriously affect the ability of Madison Dearborn to pay down the more than €1 billion it will borrow to finance the deal.

Various banks that have committed themselves to financing the deal may be forced to review their positions if they believe there is a fundamental deterioration in Smurfit's profitability.

Madison Dearborn is committed to paying €2.15 per share and the outline offer document that has been sent to shareholders makes no allowances for adverse currency or stock market movements. The document specifically warns that there is significant downside risk in the company's 2002 forecasts.

"Factors contributing to this view. . . include a depreciation in the value of the US dollar with negative implications for European and Latin American demand growth," it says.

Sources familiar with such transactions said should Madison Dearborn wish to withdraw its offer, it would be up to the Irish Takeover Panel to decide if the offer could be abandoned.

The issue is not likely to come to a head for some time as the formal offer document is not expected to be posted until next week at the earliest. Shareholders will then have 21 days in which to accept the offer but the deadline is likely to be extended.

There is also the prospect of rival offers. Texas Pacific Group, another US private-equity firm, is understood to be having high-level talks with Smurfit management, which may lead to a rival bid.

Anglo American, the South African industrial group, has refused to comment on reports that Mondi, its paper division, might be interested in Smurfit.