Tindall likely to avoid code in Red Shed bid

Stephen Tindall

Stephen Tindall and Pacific Equity Partners are likely to use a scheme of arrangement in their bid to privatise The Warehouse - a move which could circumvent the Takeovers Code and stop major shareholder Foodstuffs from being able to block the takeover.

A source familiar with the deal said Tindall, PEP and their advisers had not yet decided on the structure of the deal, but it would probably not be a standard takeover.

The primary motivation for using a scheme of arrangement would be to find the most efficient way to distribute to shareholders $100 million worth of tax credits which The Warehouse has, the source said.

However, such a scheme would also mean the provisions of the Takeovers Code would not apply.

Tindall said last week he and Australian private equity firm PEP would try to take The Warehouse private and would offer $5.75 per share in a deal valuing the company at $1.8 billion. The consortium plans to aggressively launch its grocery business into The Warehouse's stores.

Supermarket company Foodstuffs owns 10 per cent of The Warehouse - enough to stop Tindall and PEP winning the 90 per cent of the company they would need to compulsorily acquire the remaining shares in the company in a standard takeover.

However, under a scheme of arrangement the Takeovers Code would not apply and only 75 per cent of shareholders would need to approve the offer for all of the shares to be compulsorily acquired.

Foodstuffs director Tony Carter said last week that he had yet to examine the proposal, but added Foodstuffs had bought its Warehouse stake last July as a long-term investment and that intention had not changed.

It is unclear whether Tindall would use his own 27 per cent stake in the company to vote in favour of the deal, but the source said he might stand aside from voting anyway.

In that case, 75 per cent of votes of remaining shares would be needed, meaning that the deal could still proceed even if Foodstuffs voted against it.

A scheme of arrangement could be controversial. Transpacific Industries' takeover of Waste Management earlier this year was structured as a merger, prompting allegations it was trying to circumvent the Takeovers Code.

In response, the Takeovers Panel called on the Government to amend the Companies Act to close the loophole.

The Warehouse's $100 million in tax credits - known as imputation credits - are of no use to some shareholders such as Foodstuffs and 21 per cent shareholder The Tindall Foundation.

So rather than pay a special dividend - which would see some shareholders given tax credits they could not use - Tindall and PEP's advisers are looking at other schemes.

One possibility is share buyback, the source said.

Shareholders who were able to use the tax credits could sell their shares back to The Warehouse and receive cash and tax credits.

Those shareholders who did not participate in the buyback might be given a slightly higher price for their shares in compensation for not being able to take the tax credits.

The source said such a scheme was not possible under a standard takeover, hence the need for a scheme of arrangement.

Tindall and PEP are expected to make a formal proposal to The Warehouse board within the next week or two.

Probable tactic

* A scheme of arrangement is the likely method Stephen Tindall and PEP will use to try to privatise The Warehouse.

* Using a scheme would be aimed at getting the most efficient way to distribute to shareholders $100 million worth of tax credits.

* A scheme of arrangement could stop Foodstuffs from blocking the privatisation bid.