Tax credits bait for Warehouse buyback

Stephen Tindall will woo investors to accept his bid for The Warehouse by paying out tax credits that could boost the value of his $5.75-a-share offer by 65c to $1.90 a share.

The final payout will depend on how many investors accept imputation credits - a tax credit which companies can give shareholders.

The proposal - which would see Tindall and Australia's Pacific Equity Partners take over The Warehouse and privatise it - is still being developed but would aim to distribute the $100 million in tax credits held by the retailer. This would be done through a share buyback rather than a conventional takeover.

Some shareholders in The Warehouse - such as the Tindall Foundation and supermarket owner Foodstsuffs - would not be able to use any tax credits. Those shareholders would not accept the share buyback and would take cash alone for their shares. Depending on the take-up for the buyback, these investors may get up to an extra 20c a share beyond the $5.75 flagged by Tindall last week.

The value of the buyback offer would depend on demand. It is understood Tindall and PEP are looking at paying cash in a range of $4.50 to $5.75. They would then hand out tax credits on top of the cash, which would boost the final value of the $5.75-a-share offer by 65c to $1.90 a share.

The share price closed last night on $6.01, up 1c.

The proposal will go to the Warehouse board midway through next week.

It is a "scheme of arrangement" and sidesteps the Takeovers Code, meaning Tindall and PEP need only 75 per cent of shares to force the remaining shareholders to sell.

If approved, the deal, which values The Warehouse at $1.8 billion, would nullify the 90 per cent barrier under the Takeovers Code for a forced sale.

The structure removes the potential for Foodstuffs, with its 10 per cent stake in The Warehouse, to stop it going ahead.

Proponents say local institutional investors - who own about 12 per cent of the company - would be the main beneficiaries of the tax credits and the buyback scheme, although it would be open to all shareholders.

Should the scheme go ahead, a key factor will be the demand for the buyback offer which will decide where it is set.

Guesswork tips the buyback price at $4.75 to $5, which would see additional benefits to those participating of between 90c and $1.15.

If the demand was at the high end, the buyback would come in low, say $4.50.

But with tax credits of $2.22 a share the sale would be worth $6.40, a premium of 65c a share.

If demand were low, and the buyback offer $5.75, the scheme could be worth as much as $7.65, a premium of $1.90 above the $5.75 cash offer.

But the demand for the buyback and its level will also have an impact on the amount distributed to other shareholders who do not benefit from tax credits and do not take part in a buyback.