Last updated: September 2, 2013 9:56 pm

The deal breaker that wasn’t

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City’s fixation with Vodafone’s tax bill was ill-founded

A capacity for revisionism is one of the City’s competitive strengths. Telecoms analysts – and a financial journalist or two – have been backpedalling furiously on the obstacle that capital gains tax posed to Vodafone’s $130bn sale of its 45 per cent stake in Verizon Wireless.

The cost had been estimated by analysts at about $30bn. But in the event Vodafone said it would pay just $5bn. None of this, HMRC confirmed, was due in the UK. The 2002 Finance Act had exempted big overseas disposals from corporate CGT.

Nor would Vodafone generally be exposed to US taxes on the disposal of its US holding company, whose main asset is the Verizon Wireless stake, to joint venture partner Verizon. The problem, as Citi researchers correctly identified in March, is that the US unit also holds minority stakes in some European businesses of Vodafone.

Extracting these investments will trigger a US tax charge. But the damage should be less than many analysts expected because the value of European telecoms businesses has fallen sharply.

The City’s fixation with the supposedly deal-breaking scale of Voda’s tax bill was therefore ill-founded. We may surmise that the telecoms group had two reasons for failing to disabuse observers on the tax aspects of what was until Monday, a hypothetical transaction. First, the red herring reduced pressure on chief executive Vittorio Colao to do a deal. This allowed him to hold out for a higher price. The hard-nosed Italian achieved that with a 9.4 times multiple of enterprise value to trailing earnings.

Second, no one with any sense boasts about how little tax they expect to pay. Any tax inspector worth his or her salt sees that as a challenge.

Tax vigilantes such as Margaret Hodge MP, leader of the parliamentary accounts committee, must now be gnashing their teeth at what may rank as the biggest tax-free gain in UK corporate history. A generous $84bn distribution to shareholders is even structured to allow them to minimise their own tax liabilities. For Mr Colao and Vodafone, a group forced to settle a dispute on overseas tax at a cost of £1.25bn in 2010, revenge is a dish to be relished.

Trompe l’oeil

Anglo Irish Bank was no better at investing in art than it was at investing in property loans. An auction of the defunct bank’s picture collection is expected to raise just €200,000, compared with estimated costs of €30bn for the collapse of the lender.

Lehman Brothers’ art collection sold for $14.9m in 2010. Even a 1991 auction of furnishings from the London HQ of doomed fruit trader Polly Peck did better, with scatter cushions hotly bid.

The mood of Irish taxpayers regarding Anglo Irish Bank might best be represented by one of the screaming popes painted by Anglo-Irish artist Francis Bacon. Instead, most of the works offered by a Dublin auction house are drearily suburban. They feature sailing boats, swans and a landscape entitled “Evening’s Last Rays”.

At Anglo Irish the real artistry was displayed by executives who gave the bank’s balance sheet the illusion of depth and solidity. Those skills will be quantified as KPMG, liquidator to the state-owned Irish Bank Resolution Corporation, starts auctioning Anglo Irish’s loan book. It is fair bet they will not sell for their par value of €22bn.

Marginally preferable

A halo of rectitude hovers over the heads of foreign exchange dealers. Under proposals published by the Bank of International Settlements, their industry, which churns over $4tn daily, will be exempt from a requirement to put up collateral on derivatives deals.

Peers dealing in other derivatives sold over the counter will not be so fortunate. Regulators want to make off-market transactions safer and less opaque. A requirement to post initial margin on deals is part of that push.

Cynics will say that FX experts are simply better at lobbying than chums who trade other risks. But the carve-out makes sense. The collapse of Lehman in 2008 posed a danger to the financial system because of its exposures to credit default swaps, not forex swaps. Currency prices are highly transparent, deals are shortlived and voluntary margin arrangements common. These factors help damp risk.

You might add that while margins are fat for investment banks in the wackier reaches of OTC derivatives, they are pretty slim in the ultra-liquid forex markets. New costs would swiftly be passed on to customers. These include central banks, a group which BIS represents.


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