Dominic Coyle answers your queries

Sorting through Vodafone options

Last week we received a bulky envelope from Vodafone containing an invitation to choose between alternative actions including initial redemption, future redemption and initial B share dividend.

One of the documents recently issued by company is titled "Election Form for the Proposed Return of Capital to Shareholders of 15 pence per Existing Share, by way of one B Share for each Existing Share and a 7 for 8 Share Consolidation"

There are three alternative options namely "Alternative 1 - Initial Redemption", "Alternative 2 - Initial B Share Dividend" and "Alternative 3 - Future Redemption".

For, I assume, the majority of Irish shareholders, who became unwitting investors in Vodafone through their shareholding adventure in Eircom, could you please explain the proposal and the alternatives?

Mr G.Mc'D., email

Just when you think the Eircom saga has been put to bed for good, something else crops up to flummox those largely novice investors. The continued ownership of Vodafone shares by those investors - as a result of the disposal of Eircell - has only served to remind shareholders of how they were left nursing losses on the Eircom listing. The fact that Vodafone has significantly underperformed the market since Eircom shareholders were landed with the stock appears only to be rubbing salt into still open wounds.

Still, this time, you do stand to get something back from your investment. The global mobile phone giant decided recently to exit the Japanese market where it had been struggling to build a viable operation.

Following on from that it decided to return some of the money from the deal to shareholders. The amount involved was around £6 billion.

In addition, the company has, unusually, decided that it wants to lower its credit rating. Normally listed companies spend considerable time endeavouring to increase their credit rating as it lowers the interest they pay on loans.

However, Vodafone has decided that giving an additional £3 billion back to investors will only reduce its credit rating to A-, a level it says will make no appreciable difference to the interest rates it can negotiate on borrowings.

Behind these moves, of course, have been growing investor rumbling over the company's lacklustre recent performance.

Essentially, Vodafone will replace every eight ordinary shares you currently hold in the company with seven new shares and 8 B shares.

The seven new ordinary shares will be treated in exactly the same way as your current shareholding and can be held and/or traded as you would have done up till now.

The new B shares are designed as a vehicle to return money to investors and the company has provided three ways for this cash to be realised to "make use of the most efficient tax means to handling the funds".

I don't suppose this is the time to remind Vodafone that you can only have two alternatives but many options. Anyhow, under what the group describes as Alternative 1, the B shares you acquire will automatically be redeemed by the company and the euro equivalent of 15 pence (currently 21.6 cent) paid to you on August 11th.

From a tax perspective, this payment will be treated as a capital gain and, for those with a gain over the annual threshold of €1,270, will trigger a capital gains tax charge of 20 per cent.

It is important to realise that if you do nothing, and assuming the proposal to give money back to shareholders is approved at an extraordinary general meeting on July 27th, you will automatically default to Alternative 1.

Alternative 2 does pretty much the same thing. You will receive a "special dividend" of 15 pence per B share and those shares will then become deferred shares. At that point they are no use to you and will ultimately be cancelled by the company.

The difference between this and Alternative 1 is that dividend income is treated as liable for income tax, not capital gains tax, and will be charged at your higher or marginal rate.

The ludicrously named Alternative 3 will see shareholders having their shares redeemed over four dates in 2007 and 2008. Spreading out the redemption in this way will not get you any more money and is only of relevance to people with very significant shareholding - ie definitely not applicable to almost all the group's Irish shareholders.

So, effectively, you are down to Alternative 1 and 2. Each gives you your 15 cent per B share and each is payable on August 11th. If you pay no income tax, Alternative 2 is for you; if you do pay tax and especially if you do so at the higher rate, you should opt for Alternative 1.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries.