Bottom Line: The UK’s mad tax system means Voda is running out of options

 
Elizabeth Fournier
JUST last week, analysts at Credit Suisse told investors that the long-mooted merger between Verizon and Vodafone was nothing but wishful thinking.

After eight years of hoping for a resolution to the Verizon Wireless (VZW) partnership and an endless stream of float, merger, buy-out and break-up rumours, shareholders are no doubt tired of the VZW merry-go-round by now. But as they proved yesterday they’re not quite tired enough to give up the ghost yet, sending shares up by as much as six per cent as the AT&T name was brought to the table as a possible partner for Verizon.

So why, when investors are clearly desperate to see an end to the story, has the Voda-Verizon marriage lasted so long?

The less-than romantic answer can be found filed under “Chargeable gains” on the HMRC website ­– six sub-links into the department’s hideously complex explanation of the UK’s corporate tax system.

Distinct from capital gains tax, chargeable gains are paid by any company that is subject to corporation tax in the UK (e.g. Vodafone) on any gains it makes by selling an asset for more than it cost (e.g. VZW).

Analysts have estimated the hit that Vodafone would take from offloading VZW at anywhere between £15bn and £25bn, depending on its value. Whichever end of the spectrum you choose it’s a huge amount, and one that Voda – struggling in its core European markets and leaning on the imagined pricetag on its Verizon stake to drive its market cap higher – has never deemed worth the risk.

So is a joint bid from its US peers the answer to investor prayers?

It certainly gives Vodafone the chance to show the market what it could be worth, with the potential bid value of around £162bn already offering a huge premium to its current market cap. And there’s no doubt AT&T is ambitious. Having outgrown its home market it’s not a huge leap to imagine it breaking onto the European scene in such a dramatic fashion.

But after years of Vodafone failing to realise the true value from its VZW stake and dividend payments only recently reinstated after a five-year hiatus, shareholders aren’t holding their breath. Though £5bn was added to the firm’s market value in a single morning yesterday, Vodafone’s shares still didn’t even come close to the mooted offer price. Investors have clearly had enough of red herrings. Whether AT&T and Verizon decide to fish or cut bait, Vodafone needs to give them an answer soon.