KEY POINTS:
Finance Minister Michael Cullen and Revenue Minister Peter Dunne have cut the legs out from under the Mounties' horses by shutting a major tax loophole just as they turned into the final straits on the Auckland International Airport takeover stakes.
The Canadian Pension Plan Investment Board was yesterday putting a brave face on the Cabinet knock-back saying the fund still intended to proceed with the first leg of its takeover double, a bid to acquire 40 per cent of Auckland Airport at $3.655 a share.
The fund has not ruled out its plans for a subsequent amalgamation of its interests with Auckland Airport through a scheme of arrangement funded by issuing stapled securities to shareholders, even though the Government will quickly legislate against the use of such instruments.
But the upshot is that the Canadian Fund - which stood to extract a year end 2009 payment of three times what is available under existing dividend regimes - will no longer be able to make easy pickings.
The Cabinet ministers' move at first blush smacks of political opportunism. The Cabinet has had more than six months to act to plug potential major tax leakage from takeover deals funded through the issuance of stapled securities.
But Inland Revenue would have been alerted to the potential for major tax revenue losses by figures within Grant Samuel's independent report on the Canadian fund's partial takeover bid for Auckland Airport. In the target company statement issued late last year, Grant Samuel said it was possible the Canadian fund might get 40 per cent of the airport's shares, but fail to get a favourable binding ruling from IRD. Grant Samuel pointed out that an earlier proposal (by Dubai Aerospace) may have been more robust from a taxation perspective.
The critical point was that the proposed amalgamation was a mechanism designed to enable distributions to be tax efficient to overseas shareholders. In the Canadian fund's case it does not pay tax on its income under Canadian laws. The distributions on its stapled securities would be subject only to an approved issuer levy of 2 per cent of the distributions received. If the amalgamation does not proceed the fund will receive fully or partly imputed dividends which would be of no use to it.
The magnitude of what was at stake can be seen by the fact that the proposed amalgamation would have exchanged the airport's existing equity into $862 million equity and $3.4 billion of convertible notes which could be repaid to shareholders free of tax, converted into equity or retained. At present only $9 million of subscribed capital is available to be returned to shareholders free of tax.
Cullen and Dunne have trod a careful path making it clear they have not consulted with interested parties to avoid any suggestion that opponents to the Mounties bid like Infratil CEO and Auckland airport director Lloyd Morrison have got in their ears.
It remains a "very Wellington deal" nevertheless.
