Tax row as firms circle Vodafone

VODAFONE could fall into overseas ownership as it struggles to avoid a gargantuan tax bill on its stake in an American joint venture, analysts warned yesterday.

US telecoms giants Verizon Communications and AT&T are believed to be weighing up a bid to split up the FTSE 100’s third-biggest constituent, in what could be the biggest M&A deal of all time.

The total value of a deal was put at $245bn (£162bn) yesterday, sending shares in the company to 10-year highs.

Verizon has made clear its desire to buy Vodafone’s 45 per cent stake in the two companies’ joint venture, US mobile network Verizon Wireless (VZW), but talks have been held back by the threat of a tax payment running into tens of billions of pounds.

If Vodafone chief executive Vittorio Colao were to sell its stake in the venture – which was founded in 2000 – he would be left with a levy equal to the rate of corporation tax on the capital gains Vodafone has made since starting VZW. Analysts have pegged the value of the stake at up to £100bn, which could result in a tax bill of around £20bn.

Yesterday, it emerged that AT&T could provide a solution by buying the rest of Vodafone, which includes its telecoms networks in the UK, Europe and elsewhere. The deal would offer a tax-efficient return for Vodafone’s shareholders, some of whom have pushed for a sale, but would mean another UK telecoms firm going to foreign owners. Orange and T-Mobile owner EE is jointly held by France Telecom and Deutsche Telekom, while O2 is owned by Spain’s Telefonica and Hong-Kong’s Hutchison Whampoa controls Three.

Although Verizon said yesterday that it “did not currently have any intention to merge with or make an offer for Vodafone, whether alone or in conjunction with others,” speculation has been growing in recent months that a conclusion to the VZW saga is likely to be agreed sometime this year.

One former Vodafone executive told City A.M. last night: “The way [VZW] has been held, given the huge appreciation in value, capital gains tax could have to be paid. It has been a major issue, it could be so big that it puts [Vodafone] off selling [the stake].”

Emeka Obiodu, an analyst at telecoms specialist Ovum, said that if it were not for the tax associated with selling VZW outright, an outright sale would be far less likely. “A few years ago you wouldn’t consider for a second that Vodafone would be owned by someone else,” he said. “For it to become a target seemed unthinkable.”

The Institute of Economic Affairs yesterday hit out at chancellor George Osborne’s tax policy, saying: “The problem of capital gains liability paradoxically makes takeovers more likely rather than less.”

A Treasury spokesperson said: “In 2015 the UK’s main rate of corporation tax will be reduced to 20 per cent, making it the lowest tax rate in the G7.”

Vodafone and AT&T did not comment.