Q&A Dominic Coyle

Working out if Eircom investment is now in profit

Tue, Sep 24, 2013, 01:00

The history of Eircom since its initial public offering in 1999 is complicated. Can you find the 1999-2013 capital history and give it in your column? This would be a great help to the small or large army of Irish shareholders and their capital gains tax position.

Mr MD, email

Complicated is putting it mildly . . . and it has not been very productive either for almost all shareholders.

Essentially, the only people to have made money out of their investment in Eircom, then Telecom Éireann, are those who sold out in the first days after its flotation when the shares rose as much as 23 per cent ahead of their flotation price. Anyone who hung around long enough to own Vodafone shares has been nursing a sizeable loss since.

The big question for these people is whether the push to the share price as a result of the Verizon Wireless deal finally brings their investment back into the black after all these years.

Eircom was floated in July 1999 before the advent of the euro, at £3.07 . Using the euro multiplier that applied at the time we ditched the punt – dividing the punt sum by 0.787564 – you get an original purchase price for your Eircom shares of €3.90.

In December 2000, Vodafone acquired the company’s mobile business, which was called Eircell. At that time, the Revenue Commissioners ruled that, of the original €3.90 price equivalent, €1.69 related to the landline business and €2.21 to Eircell.

Later that year, after a bidding war between Denis O’Brien and Sir Anthony O’Reilly, the rump landline business of Eircom was taken private again by a consortium called Valentia for €1.335 per share. This was paid in cash but in effect crystallised a loss per share for Eircom shareholders of 35.5 cent.

If you think that’s confusing, wait until we switch now to the Vodafone side of the business. When the UK mobile group bought Eircell, the original Telecom Éireann shareholders received shares as payment in the deal.

However, it was nothing as simple as whole numbers. Oh no. Instead, for every two Eircell shares, the Eircom shareholder received 0.9478 of a Vodafone share.

It was the bad luck of the Irish shareholders to be receiving Vodafone stock at close to its record high, a level it has not seen since.

Not surprisingly, given the number of people involved, and the fractions of shares acquired in the deal, Revenue decided to set an “acquisition price” for each of the Vodafone shares now held by original Telecom Éireann shareholders. That figure was €4.66.

This €4.66 is in effect the “price” at which you are deemed to have acquired those shares and equally the breakeven price on any subsequent disposal.

So where does that leave you after the Vodafone-Verizon deal? Well, in common with all Vodafone shareholders, you will receive a “distribution” from the company on completion of the deal of a sum equivalent to 112p per share in a mix of cash and Verizon shares.

Mind you, the company has cautioned that the final value will depend on the price of Verizon shares at the time the deal is completed some time in the first three months of next year and also on the dollar/ sterling/euro exchange rate at that time. As of now, a 112p share out would equate to 132.975 cent. For the basis of this exercise, let’s round that up to 133 cent.

Then we need to look at the market value of Vodafone’s shares. As of the end of last week, Vodafone was trading at 208.5p, which works out as 246.7 cent.

When you add that to the 133 cent, the cumulative “value” of your Vodafone shareholding is 379.7 cent a share, still significantly short of the €4.66 per share initial value as determined by Revenue.

In terms of overall return, however, we cannot forget the dividends you will have received down the years on your Vodafone shares. Since Vodafone acquired Eircell, the company has paid a total of 78.2326p per share up to the end of its 2013 financial year, which ended in March.

That includes a 4p per share Verizon special dividend in 2012. In euro terms, that translates to 92.5929 cent a share at today’s conversion rates. Of course, to be accurate, you really should look at the conversion rates at the time each interim and final dividend was paid.

Totting all that up, we have the 246.7 cent a share market price of the stock, the 133 cent Verizon payout and the 92.5929 cent in dividends. That comes to 472.2929 cent a share, which means you are slightly ahead on the Eircell/Vodafone side of the investment. But remember, given the loss of 25.5 cent a share on the landline/Valentia portion of the original investment, the Vodafone price would need to be 501.5 cent for you to break even.

For capital gains tax purposes you do not include dividends – which have already been taxed as income – so you are still a good way short of any capital gains liability, even allowing for the one-for-25 bonus share issue you will have received in July 2000 for holding on to your shareholding for the first year of Telecom Éireann’s life as a public company, which will carry a “base cost” or acquisition price of zero for capital gains tax purposes.

We won’t even go into the cost in terms of the impact of inflation on your investment, or compare it to alternative investment choices . . .

This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara St, D2, or to dcoyle@irishtimes.com