Tindall's buy-back in a legal grey area

Major shareholders in The Warehouse have warned that founder Stephen Tindall's $1.8 billion plan to privatise the discount retailer may run foul of the Inland Revenue Department.

Their objections could force a rethink of the deal.

The shareholders argue that the first leg of the transaction - a share buy-back to make use of $100 million tax credits - is in a legal grey area.

Rickey Ward, Tyndall Investment Management joint domestic equity manager, said internal legal advice from Tyndall's parent Promina Group, made him "very wary" of the deal.

"My advice is that as it stands the structure would not be allowed ... there are a number of cases in history that indicate that would be the case." He declined to name those cases.

BT Funds Management equities portfolio manager Paul Richardson said he also would be seeking advice on the structure, adding "we are not actually sure that it is legal".

Shares in The Warehouse closed last night steady at $6.03.

Under the plan, investors who could make use of tax credits - mainly professional investors - would sell their shares to The Warehouse for cash and tax credits.

Those who could not take advantage of tax credits - overseas funds and some private investors - would sell their shares into a later cash offer from Tindall and his Australian backer Pacific Equity Partners.

The deal would be effected by a controversial scheme of arrangement that skirts the Takeovers Code.

Financing arrangements associated with both legs could lift returns to professional investors above Tindall's $5.75 a share offer price to as high as $7.65. Investors who could not take advantage of tax credits could see the offer rise to as high as $5.95.The exact returns would depend on take-up.

The plan, however, depends on the IRD treating share buyback as a dividend. This is unlikely to be contentious if it involves less than 10 per cent of The Warehouse's market value. But if the buyback is above 10 per cent the proposal may run into difficulties.

Last week advisers to the consortium said: "If an off-market buy-back is ... at least 10 per cent [of market value], but less than 15 per cent, there is a rebuttable assumption that the amount paid is dividend."

If the distribution represents 15 per cent or more, the amount paid is deemed to be sourced first from available subscribed capital (not subject to tax) and then as dividend.

The consortium expects institutional investors - who own 11.8 per cent of the Warehouse - to be the chief participants in the share buy-back plan.

People close to the consortium yesterday dismissed the criticism, saying PEP and Tindall had independent legal advice supporting their view.

The IRD's default position was to assume the return was a dividend. It treated the distribution as a capital return only on application from the company making the return, the sources said. There was no provision for the IRD to take a contrary position unless it received an application.

"This transaction has received careful and diligent thought from consortium members. They perceive little risk; they would not be developing this if they thought there was a risk," one source said yesterday. The plan is due to be put to The Warehouse board later this week.

The IRD yesterday declined to comment.

Tower New Zealand equities manager Wayne Stechman said that on an early evaluation the structure seemed "okay". He had not yet sought legal advice on the proposal.

But Stechman rejected Tindall's claims about the need to privatise the company because of risks associated with the move into groceries.

"Companies take risks all the time and that is why they are listed. There are potential upsides as well as downsides from risk."

AMP Capital's Guy Elliffe agreed.

"We are just beginning to see some financial impact from the new strategies, so we are a bit diffident about selling off that option to someone else," he said.

The Warehouse

* New Zealand's largest listed retailer.

* Founded in 1982 by Stephen Tindall.

* 85 stores in New Zealand.

* More than 9000 employees from Kaitaia to Invercargill.

* 2006 sales $2 billion; net profit $29.6 million.