Questions and Answers

Eircom

Thank you for your very clear explanation of how to calculate the capital loss on Eircom shares in last week's column. I would like to query one aspect of it. You use €1.365 as the sale price of Eircom shares for those who held on. Surely this should be €1.335, as €0.03 was a dividend! Using €1.335 instead of €1.365 increases the capital loss, making it a more beneficial figure to use to reduce a future CGT bill!

Mr G.C., Tipperary

You're quite right. I keep mislaying the final dividend that formed part of the Valentia deal for Eircom. Accounting for the dividend leaves shareholders who bought at the offer price at a capital loss of 35.5 cents per share but this is further amended by the indexation (see answer below). This loss can be set against capital gains from other assets.

You were certainly right when you said that the Eircom price split is not simple. Your article does not refer to indexation of the cost price. This could be an important point for anyone generating a capital gain from another source against which any losses could be offset.

Mr P.G., Dublin

An indexation factor will come into play for those people who held onto their Eircom shares from the flotation in July 1999. This multiplier has the effect of adjusting your purchase price in order to account for inflation in the interim.

In the case of Eircom, the initial €3.90 purchase price should be multiplied by a multiple of 1.098 to bring it to €4.2822 per share. This fundamentally affects the calculation of the base cost following the split of Eircom into Eircell/Vodafone and Eircom, subsequently taken over by Valentia.

As I said last week, the Revenue has determined the split between the two as running roughly 43/57 in favour of Eircell/Vodafone. It has laid down €1.11 as the trading price of Eircom on the first day of trade after the split and the price of Eircell as €1.45406.

Working out the capital gain or loss on the original deal means using the following formula: \4.2822 x 1.11/(1.11 + 1.45406) - 1.11. Rounding to the nearest cent, this comes out at €1.85-€1.11, or a capital loss of 74 cents per share at the time of the split.

For those who waited until the O'Reilly/Valentia offer, the loss would be €1.85-€1.335, a loss of 51.5 cents.

In relation to the Vodafone shares that Eircom shareholders still own as a result of the split, the base price worked back to the original purchase works out as €4.2822-€1.85, which is €2.4322 per Eircell share. Shareholders got one Vodafone share for slightly in excess of every two Eircell shares, so you need to take the €2.4322, multiply it by two and divide it by 0.9478. That gives you a figure of €5.13 per Vodafone share. To calculate any loss or gain on Vodafone, you will need to take the sterling price on the day you eventually sell the shares and work out the euro equivalent, using the sterling/euro exchange rate. At the moment, the paper loss amounts to slightly more than €2 per Vodafone share.

Is there any situation in which, if I refuse all offers from Valentia to buy my Eircom shares, I can continue to hold them as long as I wish?

Mr D.B., Dublin

No. The simple fact is that Valentia has the right to compulsorily acquire all the remaining shares in the company. That precludes any element of "offering". You are one of a host of shareholders who, nursing a substantial loss on the Eircom venture, are looking to hold onto their shares in the belief that things can only get better for the telecoms sector.

You may well be right about the outlook but, unfortunately for you, that is academic. A majority of your fellow shareholders have decided they have lost patience and will benefit more by selling now at a loss than holding on for a possible recovery. That majority, of course, included the strategic investors, KPN and Telia, who were looking to recoup their investment for their own commercial reasons, and the Eircom workers, who will now control a bigger stake at a better price than the original deal gave them. As small shareholders have discovered, they have a very small voice in the promised shareholder democracy.

Euro

I currently live in the UK and hope to relocate to Ireland next year. Would it be worthwhile to change my sterling savings to euros before the end of the year? Is it likely that the euro will become stronger against sterling when the punt and other European currencies are abolished, or is it unlikely to make a difference? Any advice appreciated.

Mr K.O'R., London

I would love to be able to give you a straightforward answer but even the market professionals would not be able to do that with any degree of certainty. The consensus view seems to be that the euro will get stronger against both sterling and the dollar over time, but there is no clarity as to when this will be. It depends whether you believe the euro will get stronger once it comes into general use and becomes "real" for large numbers of Europeans, or whether you believe the fundamentals of the US and British economies are stronger than those of the states within the euro zone, lending continuing strength to sterling and the dollar.

The exchange rate will also be affected by any moves by the British government towards joining the single currency which, it is generally accepted, will encourage sterling to a lower level. All in all, that's not a lot of help to you but as I have said before in this column, if I were able to predict the movement of currencies, I would probably be working in a different sphere.

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. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.