Vodafone (227p) has been in the news a lot, most recently with AT&T putting its rumoured takeover on hold for at least six months, an announcement that caused the share to fall back from its height of c.237p. Of most immediate concern to VOD shareholders will be deciding what to do as regards the Return of Value arising out of the Verizon transaction. Where shares are held through third party providers it is likely that these will need instruction (where an option is allowed) shortly. The record date for the Return of Value is 20th February 2014.
Just to recap; VOD has sold its share of Verizon Wireless to Verizon (VZ) for a combination of shares and cash, which it will partly return to shareholders (either through a capital return or an income return) and then undertake a share consolidation, (ie a reduction in the number of VOD shares), to ensure there will be little dislocation in the share price. The exact numbers of cash and shares to be received (which will be announced on 21st February) depend on the exchange rate and the VZ share price. At the current levels of £1=$1.643 and a price of $48.02, the VZ shares are worth 75.6p and the cash 30p per existing VOD share. So the Return of Value amounts to roughly 47% of the value in an existing VOD share. This implies that the share consolidation will be c. 1 for 2.
Each investor will have different considerations but essentially these will boil down to questions of tax, risk, valuation and where the shares are held. If the shares are held within an ISA or SIPP, then the tax question goes away and investors may not be given the option to hold the VZ shares (this may vary with provider).
In terms of tax, shareholders will be given the option to receive their cash return as a capital return, subject to CGT, or an income return, which will be treated like a dividend. So working out one’s existing CGT position for 2013/14 and seeing whether there is sufficient tax free allowance left to cover any gain is important. Equally, investors will want to consider their income tax position and whether it is more desirable to have the gain treated as subject to CGT. If the VZ shares are sold, then this will also be treated as a CGT event. Tax advisers should be consulted if in any doubt.
In terms of risk and valuation, it is relevant to look at the fundamentals for both VOD and VZ. There will also be income, diversification and exchange rate issues.
As we have already noted, different considerations will apply if the shares are held in an ISA and SIPP and brokers may apply restrictions to the options available. In my own case, it seems that the provider will not let me hold any VZ shares in the SIPP or ISA.
1. Avoid the issue and sell the VOD shares now (obviously CGT implications would apply here). VOD shares don’t go XD until June now, so there is plenty of time to buy them back if income considerations are to the fore. On the whole, however, we think VOD is a reasonable share to hold at the moment, since the Return of Value gives it some defensive characteristics (it is 12% dollar cash) and, although they may have gone away for the moment, there is always AT&T in the background. The potential downside comes from how investors perceive the new VOD and the potential for VOD itself to get involved in M&A (eg buying BskyB), which may not be popular with the market.
2. Sell the VZW shares and use the proceedsand the cash proportion to reinvest in VOD, thus keeping one’s economic and income profile much the same as previously. Providers may be able to sell the VZ shares automatically (if not VOD are offering a nil cost dealing facility; see Vodafone Investor Relations website for details of this and other matters pertaining to the transaction). Clearly, also the proceeds and cash could be used to diversify into another investment. Remember to consider the Capital and Income choices for the receipt of the cash proportion.
3. Hold the VZ shares and use the cash as in 2. above. Our analysis shows that the VZ valuation is not that excessive compared to VOD and for those who don’t mind some foreign exchange risk and income diminution (VZ yields 4.4% compared to VOD’s 4.9%) in favour of some increased diversification, this may be an attractive option. The VZ shares will come in the form of Crest Depositary Interests (CDIs), similar, for example, to the CDIs issued by Iberdrola on its takeover of Scottish Power. Investors should also consider the US withholding tax on the VZ dividend.
Each investor will have different considerations and there is no right answer. Do email us at email@example.com if you have any general questions and we will do our best to answer.