Vodafone’s Verizon Payday Seen Leaving U.K. Empty Handed

Vodafone Group Plc may reap $100 billion from its investment in U.S. mobile-phone venture Verizon Wireless and the U.K. government probably won’t get a penny thanks to an automatic exemption.

That price for Vodafone’s 45 percent stake, which partner Verizon Communications Inc. has told analysts it would be willing to pay, means the value of Verizon Wireless has tripled since it was formed. Companies are typically required to pay a corporate tax rate of 23 percent on gains in the U.K. While no deal or structure for a potential one has been announced, Vodafone could get away with paying nothing because of the so-called substantial shareholding exemption.

A transaction that sends no money into U.K. coffers could alienate Newbury, England-based Vodafone’s home government and consumers, tax experts and analysts say. Struggling to rein in a budget deficit that hit 120 billion pounds ($186 billion) last fiscal year, politicians have grilled Starbucks Corp., Google Inc. and Amazon.com Inc. executives on their taxes.

“They certainly do risk criticism,” said Ian Roxan, director of the tax program at the London School of Economics. “Given that Vodafone has already been under the spotlight in the U.K., it certainly wouldn’t put them in a good light.”

In October 2010, London protesters blockaded a Vodafone store and called the company “tax dodgers” after a 1.25 billion-pound settlement ended a decade-long dispute over how its business in Luxembourg reduced what it paid in U.K. taxes.


The substantial shareholding exemption lets publicly traded companies based in the U.K. avoid capital-gains taxes when selling shares in enterprises where the stake is bigger than 10 percent and was held for a 12-month period in the two previous years, Her Majesty’s Revenue & Customs said in an e-mail. BP Plc got the exemption when selling its 50 percent stake in Russian oil producer TNK-BP in March for $16.7 billion in cash and 12.8 percent of shares in acquirer OAO Rosneft.

The sale “is expected to be exempt from U.K. corporation tax under the provisions of the substantial shareholdings exemption,” said David Nicholas, a BP spokesman.

U.S. tax exemptions could also save Vodafone from paying “untold amounts” there, according to Robert Willens, a New York-based independent tax specialist. Verizon believes it can structure a deal so Vodafone would only owe about $5 billion in taxes there, said a person familiar with Verizon’s thinking who asked not to be named because the deliberations are private.

Price Discipline

Simon Gordon, a spokesman for Vodafone, and Bob Varettoni, a Verizon spokesman, declined to comment on tax strategies surrounding the Verizon Wireless stake. Sara Eguren, a spokeswoman at the Internal Revenue Service in Washington, said the agency can’t comment on specific companies’ issues.

Verizon executives including Chief Executive Officer Lowell McAdam met with analysts at JPMorgan Chase & Co. this week about Vodafone’s stake, according to a note yesterday by Philip Cusick, a JPMorgan analyst. Verizon “expressed discipline on price” and sees “Vodafone’s only other option to monetize its Verizon Wireless stake would be an IPO, which could potentially create a bigger tax liability versus the mid-single-digit billions in selling to Verizon,” Cusick said.

Verizon hinted the venture may not pay a distribution to its owners this year, as its priority will be to pay down $5 billion in debt coming due by mid-2014, according to the note.

$100 Billion

Verizon has communicated with some analysts that it believes the fair value for Vodafone’s 45 percent stake in Verizon Wireless is about $100 billion, people familiar with the matter said last week. That’s lower than the $120 billion valued by some analysts.

That $100 billion pricetag implies Verizon is valuing the wireless stake at about 7.5 times earnings before interest, taxes, depreciation and amortization, said Jennifer Fritzsche, a Wells Fargo & Co. analyst in Chicago. That’s a similar valuation to what AT&T Inc. offered for No. 4 mobile carrier T-Mobile USA Inc. in 2011, she said. Verizon Wireless is the largest U.S. wireless carrier.

Verizon Communications shares hit a 13-year high this week. The stock rose 0.3 percent to $52.68 at the close in New York. Vodafone dropped 0.1 percent to 193.80 pence in London. Vodafone has gained about 15 percent since Bloomberg News reported March 5 that the two carriers are working to resolve their relationship this year.

It’s “a lowball offer” and Verizon will need to go to at least $120 billion to succeed, said Todd Lowenstein, a portfolio manager at Highmark Capital Management in Los Angeles who has held shares of both companies and no longer does.

‘Crown Jewel’

“Verizon has clearly revealed their hand and gone public in their desire to complete a transaction,” he said. “With their high relative valuation and cheap financing available in the credit markets, the timing is fertile to lock this down and fully consolidate their crown jewel asset.”

During an April 18 conference call, Verizon Communications Chief Financial Officer Fran Shammo told analysts the New York-based carrier could buy out Vodafone’s stake in Verizon Wireless “in a manner that is very tax efficient and would not result in a tax on the gain in that stake.”

When Bell Atlantic Corp., Vodafone Airtouch and GTE Corp. merged assets in 1999 to create Verizon Wireless, the business was valued at more than $70 billion, filings with the U.S. Securities and Exchange Commission show.

Vodafone’s original stake could probably be valued at about $20 billion, according to estimates from Sanford C. Bernstein. A purchase price of $100 billion today would represent an $80 billion gain, and with a 35 percent capital gains tax rate in the U.S., a $28 billion bill.

Tax Leakage

As Vodafone is structured around several units globally, it could sell a U.S.-based division that owns Verizon Wireless shares through a Europe-based division, rather than directly disposing of the Verizon Wireless stake, said Willens at Robert Willens LLC. This would let the company avoid taxation on U.S. assets. The only “tax leakage” would come from the disposal of European assets, he said.

“They’re already set up for great tax efficiency,” he said. “It’s been set up for them for years. There’s never been a tax issue. It’s always been a valuation issue.”

To be sure, taxes are as much a political issue as a legal one in the U.K. Starbucks, facing a boycott after its grilling about its tax accounting by the Parliament’s Public Accounts Commission last year, agreed in December to pay a voluntary tax. Google will be called back for more questions on its U.K. activities, Reuters said on Wednesday. No decision’s been made, committee spokesman Alex Paterson said, and Google spokesman Peter Barron called the report “misleading” and said Google “will be happy to appear again to set the record straight.”

Public Opinion

While legal, some British politicians have found many large corporations’ methods of reducing their tax burdens to be manipulative.

“Public opinion is shocked and horrified at what’s going on,” said Austin Mitchell, a Labour party minister who serves on the commission. “The whole thing is a scandal.”

Mitchell, who said he wasn’t aware of the exemption rule, part of the 2002 Finance Act, said that he’d bring it up with the committee. Vodafone can’t afford to antagonize the government, which it needs for disputes over its Indian operations and in European Commission negotiations, Robin Bienenstock, an analyst at Sanford C. Bernstein, said in a note.

The European Union’s executive branch also plans to review how to tighten merger rules this year to reduce tax evasion and fraud. About 1 trillion euros ($1.3 trillion) is lost every year, Tax Commissioner Algirdas Semeta said in December.

Fiona Mactaggart, who is also on the U.K. committee, said the rule “is in many ways a reflection of a government failing to be sufficiently precise to ensure that tax obligations operate in the interests of the wider U.K. economy.”

Before it's here, it's on the Bloomberg Terminal.