Bus test case looms as Tyne & Wear seeks to wrestle back routes

Council seeking better value for public money appears on collision course with private operators such as Arriva and Stagecoach

A rainbow of buses plies the streets of Newcastle: green, purple, yellow, turquoise, blue, striped, even the odd red one for traditionalists. This is the most visible legacy of one of the Thatcher government's earliest privatisations back in 1985. Now, for the first time since public buses were deregulated, a city is trying to reassert control.

With the north-east hit hard by economic stagnation and central government funding for councils squeezed, the local authority is looking increasingly askance at a system that takes in £62m of public funding a year, while fares rise and operators reap large profits.

Powers to take buses under local control have existed since 2000, but their degree of complexity that has deterred any authority from using them. Tyne and Wear has now launched formal consultation for a quality contract scheme, in which councils can lay down the routes and fares that can be charged by private firms operating on a franchise basis. That has prompted fury from the bus operators and left transport authorities around the UK watching closely.

Three of the big four transport groups operate buses in the region, making returns their rail divisions can only dream about. Stagecoach recorded a 17.1% profit margin on its UK bus operations outside London last year, and about 20% from Tyne and Wear. Stagecoach, which operates about 40% of buses in the area, has promised to "vigorously resist" quality contracts, whether by legal challenge or closing its depots. Its chairman, Brian Souter, notoriously said he would rather "drink poison" than enter into such an agreement.

Bus fares in the region have risen each year since 1995 by an average 3% above RPI inflation. David Wood, a local councillor and chair of the Tyne and Wear integrated transport authority, said: "We're not against profits; but we think the profits are excessive and they are being taken from the public in Newcastle and given to private shareholders."

In many ways, though, bus travel in the region is thriving. Customer satisfaction measured by Passenger Focus surveys is high. In the centre of Newcastle, Eldon Square bus station is a busy, impressive facility seamlessly merged into a shopping centre, alongside John Lewis and Waitrose. Next door, Haymarket serves the larger catchment area and a constant stream of double deckers files along Blackett Street in the city centre.

But while operators queue to serve central routes and lucrative arteries at peak times, late-night services and those needed by remote communities or the elderly on certain estates are heavily subsidised with public money. The No 68 linking Queen Elizabeth Hospital in Gateshead is an hourly, taxpayer-funded "secured service", operated by Nexus, Tyne and Wear's public transport executive. A small bus winds round via quiet residential areas to Heworth interchange to connect with other bus, Metro and rail services. There are too few passengers to make a profit but it is a service valued by its mostly elderly users.

One woman heading home after leaving her husband at the hospital, said she also needed the bus to reach the shops and would be "lost without it". On the quiet Lakes Estate, passengers simply hail the bus as it passes, a boon to the less mobile: a woman boarding the bus here slips the driver a couple of toffees.

Nexus says these services would have to go if the status quo continues.

The funding it receives from local councils has been frozen, but it is underwriting the 10% of the network that private operators deem unprofitable, and has a statutory obligation to refund bus operators for concessionary travel for senior citizens, a bill that has risen to £38m a year.

It is also frustrated by slow progress in establishing a unified smartcard scheme for the public transport network, including the Metro, with bus operators refusing a capped fare on Tyne and Wear's Pop card. Nexus also believes rising fares are contributing to an increase in car usage in Newcastle, bucking the national trend.

There is some political backing across the spectrum. Transport minister Norman Baker said of the quality contracts scheme: "We're not going to promote those powers but we're not going to remove them." He said he understood both sides' view, but that what happens in the north-east will be a "test case".

Labour is less reticent. The shadow transport secretary, Maria Eagle, said: "The threats we've seen to sack staff, close depots and immediately take buses off the roads are nothing short of an attempt to blackmail councils into abandoning their efforts to get better value for taxpayers' money through reform."

Referring to Arriva, which is owned by Deutsche Bahn and runs 5-10% of bus services in the area, Eagle said: "Passengers will rightly be outraged to see an attempt by the German state transport operator to frustrate the democratic will of English councils, especially when they operate successfully in a regulated market in Germany."

Negotiations continue with the bus operators, with the possibility of an alternative voluntary "quality partnership" being discussed. Go-Ahead, which operates about half of the buses in the area, said it was "firmly committed to partnership as the best option".

Arriva said quality contracts "would require significant new investment to both set up and run in the years ahead which would cost local authorities – and in turn the taxpayer – millions of additional pounds. It will take at least three years; be controversial and disruptive. Similar benefits for passengers can be achieved far quicker through a partnership."

The bus operators claim that Nexus's funding problems stem from the costs of the Metro rail system, where passenger numbers have declined over the last two decades. Nexus denies this is a factor. The operators say their costs have risen faster than inflation, and say comparisons with London ignore such factors as a rising population and declining car usage in the capital, as well as huge public investment in buses and bus lanes.

Stagecoach said profits had paid for investment in bus services, and it had both lower fares and higher customer satisfaction scores than other operators.

The consultation on quality contracts is due to end in November. After legal scrutiny, the final decision will be made in early 2014 whether to press ahead. Some suspect the process will be so fraught that the council would rather back off.

Stagecoach warned: "We believe we're on very strong ground legally. We would take whatever steps are necessary to protect the future of a business we've invested millions in."

Tobyn Hughes, deputy director-general of Nexus, says the voluntary proposal from the private operators "doesn't come close" to meeting the transport authority's objectives. But he added: "What's important is arresting the decline in bus usership, maintaining the network and getting better value for public money. As long as that's achieved, we're happy to do it in any way possible."

Ferry troubles

The new bus war between local authority and private firms also threatens to pull in one of the region's oldest and most picturesque forms of public transport: the Shields Ferry across the Tyne.

Ferries are said to have linked the two banks of the Tyne near its mouth into the North Sea for 700 years.

In summer, tourists swell the numbers aboard the short trip that links the communities of North and South Shields, which grew up around shipyards on either side of the river.

A subsidised bus service connects passengers with the Metro station on the North side of the ferry, which is also a designated part of the National Cycle network.

But while Nexus says it is a vital transport link throughout the year, without leisure passengers it does not pay for itself. If the local authority cannot make up its funding shortfall by franchising bus operations, it warns the ferry will be axed by 2022.

Article Source : http://www.guardian.co.uk

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Stock markets soar on positive world manufacturing surveys

UK order books and output grew at fastest pace in 20 years while China's year-long contraction ended

Stock markets soared on Monday as surveys of manufacturing output around the world gave the strongest indication yet that the richest countries are finally shaking off the after-effects of the financial crisis.

British manufacturing order books and output grew at their fastest in almost two decades while China, which has suffered a year-long contraction in manufacturing output, saw activity expand in August. Factory sectors in Spain and Italy returned to growth for the first time since 2011. Only France and India among the world's biggest economies experienced falls in production and Paris will be comforted by indications that some areas of manufacturing stabilised during the summer.

India, though, appeared to be heading into deeper trouble after a fall in the rupee failed to arrest the country's first contraction in manufacturing for more than four years.

The FTSE 100 jumped almost 100 points to 6507 with mining groups leading the charge. Rio Tinto and Anglo American saw a sharp rise in their values as investors bet on a more widespread use of iron, coal and nickel. The French Cac and German Dax also rose strongly.

George Osborne has taken comfort in recent months that the UK's long-awaited recovery in manufacturing is under way. The services sector has expanded for more than a year, but the economy was unable to push ahead while construction and manufacturing contracted. Since the beginning of the year those sectors have stopped being a drag on growth and in recent months have added momentum to the growth figures.

The monthly snapshot from the Chartered Institute of Purchasing and Supply/Markit said the return of confidence, a rosier outlook for exporters and demand for new products had all helped UK factories in August.

The purchasing managers index (PMI) rose from 54.8 in July to 57.2 last month – its highest level in two and a half years.

The PMI is made up of various measures of industrial activity including orders, output, employment, stock levels and inflationary pressure.

Rob Dobson, senior economist at survey compilers Markit, said orders and output were growing at their fastest since the summer of 1994, a period when the UK was recovering from recession.

He said: "The UK's factories are booming again. Orders and output are growing at the fastest rates for almost 20 years, as rising demand from domestic customers is being accompanied by a return to growth of our largest trading partner, the eurozone."

Meanwhile, Britain's high streets have performed well this year and the British Retail Consortium said the trend continued into August. Sales rose 3.6% on a year ago as shops expanded to cope with rising demand. The BRC said the figures augured well for the autumn because they were strong enough to show an improvement on last August, when the Olympics was at its height.

Strong manufacturing growth has been accompanied by an increase in price pressures, the Markit report said. Companies reported rising costs for fuel and raw materials, with its input prices index up by 10.4 points on the month – the second highest rise in the survey's history.

The potential for a rise in inflation, coupled with analysis showing that much of the boost to the economy has been based on consumer spending while investment remained on hold, has persuaded some analysts to conclude that the quickening recovery is unsustainable.

Trevor Greetham, a director at Fidelity Worldwide Investment, accused the government of "unleashing the beast" of cheap mortgages to foster a dash for growth before the 2015 election.

He said a large part of the current recovery could be traced back to the government's Funding for Lending Scheme, which offers cheap money to banks, and the housing market scheme Help to Buy, which have channelled money into mortgages at the expense of business lending.

The TUC said the benefits of the recovery were being swallowed up by business managers and shareholders, leaving workers worse off.

Speaking before the TUC's annual conference next week, general secretary Frances O'Grady pointed out that UK workers have suffered a huge squeeze on their incomes over the last five years, with average pay falling by 6.3% in real terms.

She said many have remained on frozen or low pay while inflation has jumped, leaving someone earning £26,000 a year more than £30 a week worse off in real terms.

The study, part of the TUC's Britain Needs a Pay Rise campaign, compared hourly pay rates in 2007 (at 2012 prices) with those in 2012, and "shows the extent of the pay squeeze being felt by families across the UK as incomes fail to keep pace with rising prices".

O'Grady said the north-west was the hardest hit region in the UK following a fall in average hourly pay from £11.43 in 2007 to £10.52 in 2012 – an 8% drop in real terms.

France, India and Russia struggle

France's manufacturing sector is struggling to recover after a difficult year of redundancies at the state-backed car makers Renault and Peugeot Citroën and high-profile steel works closures.

While eurozone manufacturing activity expanded for a second successive month in August, in France the purchasing managers index was confirmed at 49.7, where a figure below 50 shows activity contracted. It was the only eurozone country where the measure of activity failed to improve.

However, output has fallen in France over the last four years far less than some other eurozone countries, and the slow rate of contraction was read by many analysts as a sign that the recession is bottoming out.

India also suffered a slowdown in manufacturing output in August, though much of the blame was heaped on the administration of prime minister Manmohan Singh, a former economics professor, who has run the country since 2004 and was re-elected in May.

The HSBC manufacturing purchasing managers' index fell to 48.5 after a drop in domestic and export orders. In the last two years GDP growth has more than halved to 4.4% and investment funds have flowed out of the country. The central bank has hiked interest rates, making it tougher for businesses and consumers to borrow.

India was not alone among the "Bric" countries to suffer a contraction in manufacturing. Russia's output also fell, largely because of government neglect and a high rouble. A drop in oil revenues exposed the weakness in manufacturing weakness, leading Vladimir Putin to suggest he may free several jailed business leaders to boost output and growth.

Article Source : http://www.guardian.co.uk

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Agency workers paid up to £135 a week less for same job, says TUC

Agency workers are being paid up to £135 a week less than permanent staff for doing the same job, despite EU rules saying they are entitled to equal pay, claims the TUC.

The union body is to launch a formal complaint on Monday against the government for failing to enforce European rules that are meant to guarantee equal treatment for temporary staff.

UK regulations implementing the EU's temporary agency workers directive entitle workers drafted in through agencies to the same pay and conditions as their permanent colleagues after 12 weeks. But the TUC says a widely used loophole means up to one in six agency workers are missing out.

The TUC general secretary, Frances O'Grady, said: "The recent agency worker regulations are being undermined by a growing number of employers who are putting staff on contracts that deny them equal pay. Most people would be appalled if the person working next to them was paid more for doing the same job, and yet agency workers on these contracts can still be treated unfairly."

The TUC has become increasingly frustrated about the growing use of the loophole known as the Swedish derogation, which allows agency workers placed with companies to be paid less than direct employees, provided the agency agrees to continue paying them for at least four weeks at times when it is unable to find them work.

On Monday, it will to lodge a formal complaint against the government with the European commission in Brussels, saying the UK is failing to protect temporary workers properly in the way it has implemented the directive.

Billy Hayes, the general secretary of the Communication Workers Union, said: "Some of the lowest-paid workers in the UK are being cheated out of their rights to equal pay by cynical employers intent on keeping their wages low."

He added these "payment between assignment" contracts can often be even worse for workers than the much-criticised zero-hours contracts, which offer no guarantee of regular work.

"The whole point of the 2011 agency regulations was to bring the principle of equal treatment, including equal pay, into UK law. But the introduction of new contracts means many agency workers are signing away their rights to equal pay – which for most people is the most important element of the regulations. The irony here is that if you're on a zero-hours contract you're actually better off because you qualify for equal pay after 12 weeks," he said.

The business secretary, Vince Cable, ordered an investigation into zero-hours contracts earlier this year, and the Labour leader, Ed Miliband, has met business leaders to discuss the issue.

Zero-hours contracts have become increasingly controversial, with some firms, including retailer Sports Direct, employing up to 90% of their workforce in this way, with no sick pay or holiday pay.

But growing use of the Swedish derogation since the agency workers regulations were introduced in 2011 suggests some employers have been looking for other ways to try to cut the cost of hiring staff.

TUC research has found that call centres, food production companies and logistics firms are making widespread use of the loophole, and the Recruitment and Employment Confederation estimates that one in six agency workers are on such a contract.

The derogation was only introduced because Sweden already offered better protection for its workers than the directive provides. Countries implementing the agency workers directive promised to prevent employers abusing the opt-out.

O'Grady said: "Swedish derogation contracts are just one more example of a new and growing type of employment that offers no job security, poor career progression and often low pay."

The TUC has argued that while unemployment is falling, the headline statistics disguise the many thousands of workers who are "underemployed" – working fewer hours than they would like – or trapped in poorly-paid jobs.

Robert Halfon, the Conservative MP for Harlow, recently raised concerns about the Swedish derogation, suggesting supermarket group Tesco had been able to use it to hire agency workers on low pay.

Article Source : http://www.guardian.co.uk

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Now supermarkets want you to live over their shops

Supermarket-built schemes may ease housing shortages, but will they actually be good places to live?

In Streatham, south London, builders are hard at work addressing the capital's dire housing shortage on a site next to the suburb's railway station. Their employer, however, is not a housebuilder such as Bovis or Barratt but Britain's biggest supermarket: Tesco.

Bustling about in hard hats and fluorescent jackets, they are putting the finishing touches to a 60,000 sq ft Tesco store and 250 apartments that sit above, behind and beside it. Living above the shop is very much back in fashion as supermarkets lead the development of thousands of homes in their latest tactic to secure new sites. As a consequence, the race for market share among the UK's largest retailers is inadvertently helping London chip away at a housing shortfall that equates to at least 32,000 new homes per year.

Tesco alone is building more than 800 homes in London in 2013, close to 5% of all the non-local authority homes being built in the capital. Its huge projects in Woolwich, Highams Green and Streatham are merely paving the way for a wave of supermarket-led home building projects which will flood across the south-east. More than 4,500 homes are being planned by the big five grocers in London alone over the coming years, according to property advisor CBRE, while construction market analyst Glenigan estimates supermarkets will be laying the foundations for more than 2,100 homes in 2014. Sainsbury's is likely to be responsible for the bulk of those, as it begins projects involving more than 1,500 homes next year. But Morrisons has planning permission for nearly 400 homes, while Asda is already involved in the building of 100 above its new store in Barking. Even Waitrose and Lidl are getting in on the act.

In the last couple of years, the big five seem to have woken up to the idea of developing homes alongside their retail portfolios, says Robert Davis, research director of Glenigan. He estimates that between them Tesco, Sainsbury's, Waitrose, Asda and Morrisons completed just 267 units in 2012, but that this will soar to more than 1,000 this year and double again next year. Some of these projects were first dreamt up nearly a decade ago but the complexity of gaining planning permission and assembling the sites mean that they are only now coming to fruition.

Helped by an upturn in the housing market, some enormous development projects are about to hit the street, such as Sainsbury's partnership with Barratt to redevelop the site of its supermarket in Nine Elms, in south London, involving nearly 700 homes, an 80,000 sq ft shop and a tube station. But supermarkets are also involved in small-scale urban developments, such as transforming moribund pubs into local convenience stores with a few flats above.

Most of these projects are in London, partly because that's where there is demand for the kind of flats easily built above a shop. Building over a busy supermarket is also relatively expensive, so such pricey apartments are more likely to find buyers in places like London where house prices are recovering rapidly.

But supermarkets have also been pushed into building in the capital because of planning guidance which encourages all new retail developments to include a residential element unless there is a very good reason not to do so. "There is a massive shortage of housing in London. Planners saw supermarkets wanted to grow and they are capitalising on that to force them to help solve the problem," says CBRE's John Witherell.

Local authorities outside London are also looking how they can capitalise on the trend. But Witherell believes these building schemes are more difficult to get off the ground outside the south-east because of lack of demand and the relatively high cost of such homes.Sainsbury's completed a development involving 100 homes in Leek, Staffordshire, this year and Tesco recently completed student accommodation block in Gateshead with nearly 1,000 bedrooms, but such projects, so far at least, have proved more rare.

Supermarkets are looking at a variety of solutions to make above-store building more cost effective, including putting pre-fabricated structures on top of existing shops, according to Witherell. Kathy MacEwen, head of programmes for Cabe, says: "There are many benefits to mixing supermarkets and housing. It makes more efficient use of land, while having residents supports activity and natural surveillance of streets, particularly when the store is closed."

Yet some concerns have been raised about the design and quality of the housing supermarkets are building, given the main purpose of the development is usually to open a new store.

Is it really wise to hand over the development of whole urban communities to the supermarkets? MacEwen says careful design is needed to avoid noise, smells and the sight of unattractive activities like waste storage and removal, deliveries and everyday operations.

But Witherell and Peter Sloane at property company Savills, who is leading sales at Tesco's Woolwich site, says the flats are selling well, which has boosted the prospects for more schemes. Tesco says it is in its interests to build quality homes which are popular with tenants.

"After building we remain the main tenant and occupier for years, so we have an added incentive to make sure these are developments of the highest quality. They need to last and be great places to live, work and shop," a spokesman says. With many more supermarket-backed homes appearing in the next few years, retailers will have to deliver the goods.

Article Source : http://www.guardian.co.uk

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Beware the Ides of September: a turbulent month for the economy

It brought Lehman Brothers' collapse and Northern Rock's run, now Syria, the Fed Reserve and G20 are among new flashpoints

September is a dangerous month. Five years ago this month, Lehman Brothers went belly-up. Twelve months earlier there was the run on Northern Rock. Black Wednesday in September 1992 saw Britain's departure from the exchange rate mechanism; the pound left the gold standard in September 1931.

The signs are that September 2013 will also be an interesting month. That's interesting as in scary. There are five potential flashpoints: Syria, the G20 summit, emerging markets, the Federal Reserve meeting to discuss scaling down the US stimulus, and the German election. Any one of them has the potential to damage the global economy.

Let's start with Syria. Military action by the west against the Assad regime could affect growth in two ways: directly, through higher oil prices, and indirectly, by depressing business and consumer confidence.

On the face of it, there is no real reason why the air strikes favoured by Barack Obama should have led to the price of crude rocketing.

Syria is not an oil producer and there would only be an impact on oil supplies if Iran tried to close the Strait of Hormuz. This seems unlikely. But commodity markets quite often ignore economic fundamentals. There is already a Syria premium built into the price of Brent crude, which was changing hands at just under $120 a barrel in London last week. Any hint of the conflict spreading beyond Syria will see the cost of oil rise further, and while talk of $150 a barrel seems overly pessimistic there have been plenty of examples of rumour, fear and speculation combining to ramp up prices. Capital Economics estimates that $150 crude would knock a percentage point off global growth, turning a lacklustre performance into something close to stagnation.

The impact on sentiment is impossible to gauge. There were no long-lasting effects on confidence from the much more extensive military action in Iraq a decade ago, but that was before the Great Recession of the past five years. Businesses looking for a fresh excuse to keep investment plans on hold may find that Syria provides it.

That is more likely to be the case if the G20 summit in St Petersburg ends in acrimony. The conclave of developed and developing countries was supposed to usher in a new epoch of more co-operative global governance, and so it did – for the first 12 months after the G20's inaugural meeting in Washington in 2008.

Since then it has been downhill all the way. G20 countries have failed to agree a joint line on economic stimulus versus austerity, and in the end member countries have simply done their own thing.

But this time the summit could get really nasty if Vladimir Putin cuts up rough over US policy towards Syria, and gets backing from China. On past form, the chances of a big diplomatic bust-up are high, in which case expect markets to respond in their time-honoured fashion by seeking out safe havens in gold, the Swiss franc and the US dollar.

This would exacerbate the problems of the more vulnerable emerging market economies, which have already seen sharp falls in their currencies against the dollar. India, which saw the rupee sink to a record low last week, and Indonesia, which raised interest rates to defend the rupiah, are the most exposed. Both India and Indonesia have deep-seated structural problems and these have been exposed by the Fed's announcement that it was contemplating scaling back – or tapering – its asset purchases under the quantitative easing programme. Money has flowed out of emerging markets and back into the US as a result, prompting fears of a rerun of the Asian currency crisis of 1997.

These fears are almost certainly overblown. The trouble in the late 1990s was caused by countries with fixed exchange rate regimes trying to cope with vast hot money flows, which came flooding in and then flooded out again. The worst-affected nations had high levels of foreign currency debt and insufficient reserves with which to fight the speculators. None of that holds true today. There has been no repeat of the big capital flows seen in the 1990s, while floating exchange rates and substantial reserves mean emerging market economies are far better placed to defend themselves.

Which is just as well, since collectively the emerging markets are far more important to the health of the global economy than they were in 1997. As Nick Parsons of National Australia Bank notes, 30 years ago the advanced world made up 70% of global GDP, with emerging markets the other 30%. Today the split is 50-50. As a result, he says, the Fed needs to be careful at its meeting on 18 September.

"US policymakers must increasingly be aware of their global responsibilities. The world economy, more than at any point in history, depends crucially on the success of the emerging market bloc and its fast-growing, populous nations. In 1998 the world economy withstood the Asian crisis. An emerging market crisis now – with policy stimulus in the developed world largely exhausted – would be a global, not merely a local concern."

Of all September's potential pitfalls, policy error by the Fed is the one troubling markets the most. A year ago that would not have been the case, when pundits would have put the German election on 22 September at the top of their list of concerns. That is no longer the case as fears of a breakup of the euro have faded and Europe has emerged from an 18-month double-dip recession. But the eurozone's economic recovery is fragile and the need for a third bailout for Greece shows that the debt crisis is far from over. A tougher approach to indebted countries by the new government in Berlin would not be helpful.

Action by the Fed is likely to be modest. The US central bank is not proposing to stop stimulating the economy, merely to trim the amount of support it provides. The likeliest outcome is that asset purchases will initially be tapered from $85bn a month to $75bn (£55bn to £48bn), the equivalent of a doctor slightly reducing the dosage of a powerful drug in the hope that eventually the patient can be weaned off the medication altogether.

Ben Bernanke, the chairman of the Fed, has adopted a reassuring bedside manner in his dealings with the stimulus junkies of Wall Street. He has talked through exactly what he plans to do and when he plans to do it. He has made it clear that he doesn't expect markets to stand on their feet overnight. Even so, there is still no certainty about the way things will pan out. Central banks have been using large doses of experimental drugs, and nobody knows for sure whether there will be hazardous side-effects.

In a month's time we should have some sort of inkling of just how dangerous those side-effects might prove to be.

Article Source : http://www.guardian.co.uk

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Vodafone confirms talks over $130bn sale of Verizon Wireless

Company in 'advanced discussions' regarding disposal, but it warns there is no certainty of agreement being reached

Vodafone has confirmed it is in "advanced discussions" to sell its stake in Verizon Wireless for $130bn (£84bn), with reports suggesting the largest corporate transaction in a decade could be announced on Monday.

The Vodafone board is understood to have met to approve the deal on Sunday, with Verizon's directors due to meet on Monday. The companies are expected to publish the terms of their agreement later in the day.

In a statement on Sunday night, the British company said: "Vodafone confirms that it is in advanced discussions with Verizon Communications Inc regarding the disposal of Vodafone's US group whose principal asset is its 45% interest in Verizon Wireless for $130bn. The consideration would substantially comprise a mixture of Verizon common stock and cash."

The company warned "there is no certainty that an agreement will be reached", and said a further announcement would be made "as soon as practicable". Goldman Sachs and UBS are advising Vodafone on the deal.

Vodafone is on the verge of relinquishing a 45% interest in America's largest mobile phone company to its joint venture partner Verizon Communications, allowing the fixed-line telecoms group to take full control after 13 years of often fractious shared ownership.

The sale is expected to lead to a multibillion injection of cash into the British economy. Verizon Communications is reportedly offering to pay half of the purchase price in cash and the balance in its own shares, with Vodafone investors lobbying for a majority of the proceeds to be returned to them.

Analysts at Citi said on Friday Vodafone could distribute $40bn in cash and Verizon shares valued at between $26bn and $34bn to shareholders.

They also believe Vodafone can structure its deal so as to reduce tax to $5bn, significantly less than the $40bn that could be due. Under the terms of the deal, Vodafone would sell the US-registered company through which it owns Verizon shares and a number of its European assets to Verizon Communications. The European assets would then be sold back to Vodafone, minimising the tax bill.

Vodafone could also take advantage of UK legislation known as substantial shareholdings exemption, which means companies do not have to pay capital gains tax on profits made from selling shares in another firm.

With proceeds from the blockbuster transaction likely to be out of the reach of the British tax authorities, the deal could deepen the controversy about Vodafone's contributions to the public purse in the UK.

A further $5bn may be deducted from the purchase price in exchange for Verizon relinquishing its stake in Vodafone Italy, leaving $120bn to be paid in cash and shares.

Verizon is understood to be raising $60bn in cash, with the financing in a mixture of loans and corporate bonds arranged by JP Morgan, Morgan Stanley, Barclays and Bank of America Merrill Lynch.

A $60bn payment in Verizon Communications shares would see Vodafone and its investors handed a substantial slice of the US company. As of Friday, Verizon Communications had a stock market value of nearly $136bn.

Vodafone's exit from Verizon Wireless would be the largest transaction since Time Warner was bought by AOL in 2001, and the third largest in corporate history, after the AOL deal and Vodafone's purchase of German telecoms group Mannesmann.

Article Source : http://www.guardian.co.uk

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