Q&A Dominic Coyle

Counting the cost of Vodafone investment

Tue, Jan 14, 2014, 01:07

Maybe you might give us long suffering shareholders a little advice on filling up the Vodafone-Verizon form(s). The Vodafone circular is very complex, so much so that the “expert” people who wrote it state that it is very complex!

Saying that is complex is an understatement, so how on earth is an “ordinary” person supposed to understand the language and figures used in the hefty circular. They say, any queries a shareholder may have should be directed at their tax advisors!

Anyway, perhaps you might help us out with a little plain advice on whether a shareholder with a mere 1,000 Vodafone shares since the Eircom ( Year 2000) days would be subject to Capital Gains Tax.

Most of us lost heavily so I would assume no tax

Mr S.H., email
It’s a salutary reflection that, after all these years, those who bought into the State flotation of Eircom in 1999 are still in the red.

The all-share acquisition of Eircell by Vodafone left the original Telecom Éireann shareholders with stock in Vodafone which have consistently underperformed.

So what now as those shareholders receive some cash and shares in yet another company – US telco Verizon – in a return to shareholders by Vodafone following the sale by the company of its US business to its partner in that enterprise, Verizon.

The first thing to bear in mind is that we will not know the precise position until the deal is confirmed – the value of the deal will depend on the share price of Verizon on that day as well as the foreign exchange rate from dollars to euro. But if you follow the process outlined ahead you will be able to determine your position.

Working out the maths, the starting point is the €3.90 that you originally paid for your Eircom shareholding. When Eircell, the original mobile business of the then Telecom Éireann was sold to Vodafone in 2001 and Sir Anthony O’Reilly’s Valentia consortium later that year took the rump of the company private – paying shareholders €1.335, excluding a dividend payment – Revenue stepped in to determine the how much of the original €3.90 purchase cost was accounted for by each side of the business.

It decided that €1.69 related to the fixed line business taken private by Valentia. That meant shareholders were out of pocket by 35.5 cent on each Telecom share simply on the basis of that deal.

The Eircell side of the operation was deemed to be worth €2.20.

To complicate matters, the Eircell deal did not deliver an easily calculable translation into Vodafone stock. For every two Eircell shares, shareholders received 0.9478 of a Vodafone share.

Tax liability
As you can imagine, that was asking for trouble in assessing any tax liability – especially given the number of “novice” investors involved in the Telecom flotation. Revenue, unsurprisingly, decided to set an “acquisition price” for the Vodafone shares of €4.66 per Vodafone share.

Most holders of stock originally acquired the shares in the flotation, which means indexation of the original purchase price to allow for inflation applies – at least to the end of 2022 when then minister for finance Charlie McCreevy abolished it.

Essentially, it applies a multiple to the original price, lowering any subsequent capital gain. Allowing for indexation, the Eircell holding would, as of now, be working off a base cost of almost €2.64. This would make the “base cost” of Vodafone shares €5.27.

However, and this is important, indexation cannot be used to exaggerate a loss. So, if you sell you shares below the €4.66 price, indexation is irrelevant. If, however, you eventually secure a total return above that €4.66 level, indexation will become relevant.

Finally, before we get to the current transaction, in 2006 Vodafone returned money to shareholder by way of a consolidation which created seven new shares for every eight old Vodafone shares held plus a cash payment of 15 cent per original share.

As the deemed “purchase price” of the original Vodafone shares was €4.66 a share, the purchase price of each of the new shares after the consolidation is €5.32, or €6.02 after indexation.

Right, now we get to the current transaction. As already stated, the precise price will not be settled until around February 21st when the transaction is completed. At the time it was announced, the windfall of $84 billion was to be allocated between all shareholders – around $23.9 billion as a special cash dividend and around $60 billion in Verizon shares.

The best guide is the worked example given by Vodafone in its documentation to shareholders. This is based on the market value of Verizon shares and the dollar/ sterling rate on the situation on December 6th last.

Hold or trade
It states that each shareholder would be entitled to $1.22 in Verizon shares and $0.49 in cash for each Vodafone share they currently own. At the prevailing dollar/euro rate on that date, it would translate into 89 cent in Verizon stock and 36 cent in cash.

Before you get too excited, as the Verizon share price on that day was $49.48, you would get just under 2.5 per cent of a Verizon share for each Vodafone share you hold. This means you would get one Verizon share for roughly every 40 Vodafone shares you currently hold.

You can either hold on to these shares or trade them in through Vodafone commission and dealing cost-free dealing service, provided you have fewer than 50,000 Vodafone shares.

On the cash side, your 1,000 shares would, on the figures above, give you a cash payment of €360 – well below the annual CGT exemption of €1,270.

Of course, you will still have your Vodafone shares – now trading above £2.30 – even if they will likely fall in price following the completion of this deal. However, as part of the transaction, there will also be a further share consolidation, requiring more maths. Details won’t be known until this deal closes.

Assuming you sell your Verizon shares at the “illustrative” $1.22, your return to date on the Vodafone side of your holding is $1.22 plus $0.49 cash (about €1.25) plus 15 cent from the previous Vodafone consolidation, a total of €1.40.

Even on the €5.32 post- consolidation purchase price before indexation, you need the Vodafone share price to head towards €4 before you start looking at a profit and it’s a good way from there at the moment, sitting at about €2.82. And that’s before making back the 35.5 cent loss per share on the Valentia deal. It’s a bit early yet to close the book on this deal.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, Dublin 2 or email to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice.

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