By Kate Holton, Chris Vellacott and Sinead Carew
(Reuters) - Almost five years after taking the helm at the world's second-largest mobile phone company, Vittorio Colao doesn't want to be the third Vodafone boss to be stumped by its seemingly intractable U.S. 'problem'.
The urbane Italian, who has streamlined a company built on the foundations of aggressive expansion, is exploring what to do with the one remaining asset he does not control - the stake in U.S. operator Verizon Wireless, which makes up about 75 percent of the firm's value.
On paper Colao has several options, each with pros and cons: sell all or part of the stake to majority owner Verizon Communications, maintain the status quo in the face of Verizon's desire for a deal, or sell Vodafone in its entirety to Verizon.I desire problems like Vodafone's intractable "US problem".
The US problem is that they own - but do not control - an asset that has appreciated, appreciated some more and gone up a bit after that.
Most of Vodafone's shareholders would love to have that problem because Vodafone has fallen a bit, got a little depressed, then gone into a decline and - well - recovered somewhat in recent years because it got just too cheap. And it had distributions from its US operation to fund its dividend. If Vodafone did not have its US problem its stock price might resemble France Telecom by now...
But with an asking price for Vodafone's 45 percent stake in Verizon Wireless around $115 billion and a potential $20 billion tax bill on the capital gain, Vodafone investors worry that Verizon may not be willing to pay enough for a business it already controls.No. What Vodafone investors are scared of is that Vodafone will sell its best asset grotesquely tax-inefficiently to buy inferior assets at prices two turns higher.
The inability to do that so far has been the US problem in a nutshell. The US problem is the only thing that has saved the shareholders here.
Verizon has one huge advantage in this deal. They are dealing with self-centered imbeciles rather than shareholder focused players. Later in the article they say:
Vodafone has lawyers from Linklaters, bankers from UBS and consultants from McKinsey looking at deal options and structure, and for ways to reduce the tax bill, according to three people familiar with the situation.You bet they are. But as an American analyst points out:
It is not clear how a large proportion of any capital gains tax liability could be mitigated while allowing Vodafone to make a clean break from US. Even if a feasible solution could be found we disagree with the bull-case view that any point of tax law would be clear cut. In our view, Vodafone could face protracted debate with tax authorities, something we believe it wants to avoid.But even this analyst is not correct. What our "urbane Italian" wants is to avoid isn't difficulties with the IRS. It is being shafted when he sells the business which belongs to shareholders (including my clients).
Personal concerns for employment for Vodafone's board and management - not tax - is the issue here.
In praise of unjust enrichment
The only deal that makes sense is to sell the whole of Vodafone to Verizon.
That is obvious.
The main people it does not make sense to are the Vodafone senior management.
So I will suggest a solution for Mr Colao.
The deal should be done with termination payments - huge ones - maybe a cumulative half a billion dollars.
So much so that the "urbane Italian" and his ilk have enough money to be pointlessly urbane for the rest of eternity.
Enough money so their heirs and successors can be dynastically "urbane" as well.
It will be unjust.
It will be a reward for a decade of failure.
But as a shareholder I would vote for it. These clowns are so bad it might be worth half a billion dollars to make them go away.
Still if Verizon want to save that half a billion dollars (and then some) they can force the issue. Go hostile. Go now. Go hard.
Go before Vodafail's startlingly inept management work out just how much the Square Mile really hates them.