There's more to Vodafone's tumble than short-selling

Falling Star

There was little evidence yesterday that hedge funds were solely responsible for the recent fall in Vodafone's share price despite chief executive Sir Christopher Gent's protestations.

While City sources believed hedge funds had been particularly active in Vodafone stock recently, they did not consider that any "short-selling" carried out by those funds was the only reason for the dip in the mobile phone operator's share price.

"While the short interest has climbed quite significantly in recent days, it's still very small. It's highly unlikely that that's the sole reason for the shares going down," said one City source.

The practice of short-selling involves traders selling shares they do not own in the belief the price will fall and they will therefore be able to buy them back cheaper in the future.

Another banking source estimated that as little as 1.5 per cent of Vodafone's share capital was "short", although that had climbed from about 1 per cent a week ago.

"In other words, that [the short-selling] is nothing more than a pin prick," the insider said. "It looks like long-only funds have been cutting their positions."

Shares in Vodafone fell sharply last Friday, plunging beneath the key £1 level, after the mobile phone operator cut its financial forecasts for its German and Italian businesses. Shares in the company, however, finished up 9 per cent last night at 104p.

While the company stressed that last Friday's statement did not constitute a profit warning, many City analysts interpreted it as an alert and have since cut their financial forecasts.

The fall in the company's share price prompted Sir Christopher to hit out at hedge fund trading activity yesterday, accusing the funds of "short- selling" Vodafone shares and eroding shareholder value.

"We're almost getting shareholders destroying shareholder value," Sir Christopher said, adding: "Hedge funds are spooking genuine investors."

While analysts believed that hedge funds had been shorting the stock recently, they did not think that was the only reason behind the fall in share price.

"On Friday, the majority of the volume was hedge fund driven," said one analyst who did not want to be named. "The thing about Vodafone is that a lot of people own it, it's highly liquid and in the current environment, the hedge funds can take advantage of that and they have been playing games."

He estimated that about 50 per cent of the volume of Vodafone shares traded in the early part of 2002 was down to hedge fund activity. However, he said over the past month that had changed and that long-only funds, or funds which can buy shares but cannot short them, had become more active.

On Friday, Vodafone said it expected its Italian Omnitel business and its German D2 business to produce combined sales of €13.3bn (£8.3bn) and underlying, or Ebitda, profits of €5.9bn in the year to March 2003.

While the company said it had not revised its view of either current trading or future prospects, that new guidance was well beneath analysts' forecasts and prompted many to cut, or consider cutting, their numbers.

Earlier this week, the investment bank Goldman Sachs reduced its recommendation on the stock to "market outperformer" and said it did not expect the shares to trade "sustainably above" 125p in the next six to nine months.