US tax hitch puts Vodafone in limbo

The stalemate between Verizon and Vodafone and over the future of Verizon Wireless, their joint US venture has led to increasingly ambitious proposals, but none yet has established a solution for an intractable $40 billion tax problem.

The considerable capital gains tax bill from the sale of the UK group’s 45 per cent stake in Verizon Wireless has led to talk of various indirect solutions, not least the suggestion that Verizon could instead buy Vodafone outright with US rival AT&T to carve out the business. While current plans have been denied by Verizon, the problem still remains how it can coax Vodafone into a deal for the biggest US wireless operator by subscribers knowing that the UK telecoms group would be saddled with a bill for as much as $40 billion, according to analyst estimates. Moreover the current “cellco structure” gives Vodafone tax-free, dollar denominated cash dividends from Verizon Wireless, that last year amounted to £2.4 billion making it more valuable in its present form than in a sale to Verizon, says Robin Bienenstock, analyst at Bernstein. She describes the tax hurdle as “insurmountable” unless Verizon is willing to pay a “prohibitively expensive 12 times ebitda or higher” price to cover these costs.