The sale of Vodafone's US business to Verizon is one of the biggest-ever corporate deals - and it will trigger one of the biggest-ever payouts to UK shareholders. If you are a Vodafone shareholder, you need to be taking action now to ensure that you get your pay-out in the best way for your fiscal circumstances.
Background and deadline
Verizon announced last September that it was to acquire Vodafone's 45 per cent stake in their jointly owned US mobile business in a deal worth $130 billion (£80 billion). Almost two-thirds of that - £54 billion - is to be returned to shareholders, 40 per cent of which is destined for the pockets of UK institutional and retail shareholders.
The pay-day is fast approaching: investors will start finding out exactly what they will be getting from 19 February and the proceeds should reach their accounts by 4 March.
So too is the deadline for deciding how you want the proceeds paid: for example, investors who hold their shares through our sister website Interactive Investor have to submit their forms of election - choosing how they want the 'Return of Value' (as Vodafone dubs this) to be treated for tax purposes - by 23:59 on 17 February. If you hold your shares directly, you have until 1pm on 20 February to return them to Computershare, Vodafone's registrars.
How the payout works
The Return of Value is in two parts. About 28 per cent of the sale proceeds, or roughly £28.3 billion, will be a straightforward cash payment; another £39 billion or so will be paid as shares in Verizon, structured as CDIs (Crest Depository Interests) for UK shareholders. This equates to about 30p in cash and 75p in Verizon shares for every Vodafone share held - the exact amounts will depend on the Verizon share price and the dollar exchange rate on completion day, which is expected to be 21 February.
There are also two ways investors can receive the proceeds for tax purposes: the Income and the Capital option. Under the Income option the proceeds will be treated as income so could be subject to tax at your highest rate, while, under the second option, they will be treated as capital gains.
Those who hold their shares through an ISA will not suffer the tax anyway as holdings in an ISA and income and capital gains are tax-free. If you hold your shares outside an ISA, the decision will depend on your income tax rate and whether you have made any other capital gains this year.
The tax-free allowance for capital gains is £10,900 in the current year so anything less than that will not incur a charge. Above that limit, gains are taxed at 18 per cent for basic rate tax payers and 28 per cent for those on the higher band. The best option for you will depend on your individual circumstances - you may need to seek professional advice. If you fail to make an election, Vodafone will chose the Income option on your behalf.
Having chosen your tax option, the next key decision will be what to do with the cash and shareholdings you will be left with. The return of value accounts for roughly half of Vodafone's market capitalisation, so it will be roughly half its current size when the deal is completed, although it will also undertake a consolidation of its shares so that the quoted price will remain roughly the same.
A future slimmed-down Vodafone
One of the key attractions of Vodafone's shares has been its yield - currently a generous 4.7 per cent. It has had a prolonged period of regular dividend growth - over the past 12 years, it has averaged 19 per cent. It is committed to maintaining its dividend growth record and has even hinted at special dividends or share buy-backs to enhance the payment further. That its cash flow will now have to be divided between a fewer number of shares means that cash cover will improve, boosting the chance of higher pay-outs.
It intends to use more than half of the Verizon proceeds it is retaining to pay down debt but has earmarked £9 billion to invest in faster-growing areas such as digital and 4G technology - investment which could include acquisitions. It has been talked of as a takeover target itself - US giant AT&T has just denied it plans a bid but rumours continue to circulate.
The high yield, steady growth and the spice of bid interest mean it is worth holding on to Vodafone's shares.
Hold or fold the Verizon shares?
The second question is whether you should sell your Verizon shares. Holding US shares directly is likely to be too big a headache for many UK investors: there are different tax rules and you will need to make elections to reduce the tax on your dividend payments. However US shares can be held within an ISA, which reduces these complications.
Verizon's business is similar to Vodafone's and the attractions of the UK company mean it is likely to be preferable to sell the Verizon shares. Interactive Investor clients can sell - or buy more of them - and other international shares for free in an international dealing promotion on the website between 24 February, when the new Verizon shares are expected to be issued, and 7 March.
One further consideration, however, is that the other Vodafone shareholders across the world may be thinking the same way and, if too many of them decide to sell out immediately, it could depress the Verizon price in the short-term. There will already be some discount in the Verizon share price for the impending increase in the number of shares in issue but it may be worth delaying for a month or so should you choose to sell your Verizon shares.
Reinvest the cash or redirect?
Finally, what should you do with the cash raised - assuming it is not already earmarked for paying off debts, a trip away or some other consumer spending. The return of value means that, unless you reinvest the proceeds, your financial exposure to the telecoms industry will have halved.
That may not concern you, particularly if you retain a large Vodafone stake or have other telecoms interests such as BT or some of the foreign players. But if you do want to put the money back into the stock market, Vodafone's yield makes it worth considering topping your holding up again.
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