Setting loss on Eircom shares against the summer house gain

Sparked by your recent article, I have a very simple query that might need a very complex answer (and you may have dealt with it before), but have you calculated the actual loss that someone would make in the following situation?

I, and my wife each invested IR £4497.55 (1,465 shares) in Eircom in July 1999. This holding was brought up to1523 (each) with the addition of the loyalty shares.

After the changeover to Vodafone we were left with 721 Vodafone shares each, and we recently cashed out all our shares in the move to Verizon.

At all times we took the “do nothing option” and let be what will be. We specified Capital for the designation of payment from Verizon, to avoid income tax.

As it happens I sold a summer house this year and made a capital gain, so I am trying to calculate the exact loss on the disposal of my Eircom/Vodafone/ Verizon shares so that I can off-set it against the capital gain from the sale of the property.

I have read the Revenue Note Return of Value to Vodafone Group plc (“Vodafone”) Shareholders & related share consolidation by means of a scheme of arrangement under part 26 of the UK Companies Act 2006 but that doesn’t cover the situation from the beginning . . . ie from the original investment in the Eircom shares.

Mr RB, email I'm going to start with a word of caution. As you state, the question might be easy but the answer is definitely not straightforward because of all the various takeovers, consolidations, mergers, payments in stock etc – to say nothing of the loyalty shares. So, while I will certainly give you my best answer, it is between you, your financial adviser and the tax man to determine an accurate assessment for Revenue purposes.

You’ve clearly done some heavy reading already so I assume you understand that.

Essentially, there are four elements to your calculation – and, fortunately, Revenue has done all the heavy lifting in a series of reports on Eircom valuations down the years.

First, before we get to the Vodafone holdings and the more recent events, let’s go back to the original breakup of Eircom.

Revenue calculated that your original purchase price per Telecom Éireann share was €3.90. So for your 1,465 shares, in euro terms, the purchase price was €5,713.50.

When Tony O’Reilly’s Valentia took the landline business private, he paid €1.335 per share. Revenue valued that part of the business at €1.69, so there was an early loss of 35.5 cent per share.

But what about the free shares? Well, clearly there was no loss there and the €1.335 per share paid by Valentia would be considered a gain. In your case, each of you had 58 free “loyalty” shares for holding on to your stock for a full year after flotation. At 1.335 per share, your gain on 58 shares would have been €77.43 each.

While this would be well below the annual capital gains tax exemption limit of €1,270, that does not come into play as you need to offset gains against losses in any given year first – and indeed future gains against residual losses – before setting net gains against the annual exemption limit. We’ll return to that element of the transaction in a minute.

Now, let’s look at the Vodafone shares you received for the purchase by it of the original Eircell mobile phone business.

This involves the cash payout and the value of the Verizon holding which you sold. Revenue has determined that your loss on these two transactions is 72.1 cent per original Vodafone share – and they have factored in the free shares in that calculation.

Finally, there are the remaining Vodafone shares you still own after that return of value exercise – remember Vodafone issued six new shares for every 11 previously held. Assuming you have not yet sold these, they are also trading at a loss.

In general, they are trading around the £1.90 level in London, equivalent to €2.40 in very round terms. According to Revenue’s calculations, you would need to be getting €4.58 a share for these before they would be in profit, so you are currently nursing a loss in the region of €2.20 a share on each stock in your outstanding holding.

Getting back to your actual share numbers, you had 1,465 Telecom Éireann shares each, plus the 58 free shares. These translated into 721 Vodafone shares each at the time of the original Eircell transaction. Thus the loss to each of you on the Valentia deal was 35.5 x 1, 465 which comes to €520.075. Offsetting the “gain” on your loyalty shares, of €77.43, your loss on this element of the chain was €442.645 each.

On the Vodafone shares, your crystallised loss in the “return of value” is 72.1 cent for each of your original 721 shares, which is a total of €519.841. That brings your total cash loss to that point to €962.486, or €962.49 each – some hit on an original investment of just over €5,700 each.

As to what remains, allowing for the earlier seven for eight consolidation of shares and the more recent six for 11 transaction after the return of value exercise, I estimate, you should now hold 343 “new” Vodafone shares each – unless you have sold them in the market since that time.

As the market now stands, you are roughly €747.74 in the red on these, although clearly that will not be crystallised – and available for offsetting against the capital gain on your summer house sale – until you actually dispose of them.

Assuming you did sell them now, depending on the actual market price and the sterling/euro exchange rate, your total “loss” on your Eircom adventure would be €747.74 + €962.49, which comes to €1,710.23 – each.

Sobering thought, isn’t it.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.