NZ Herald: Airport deal not so sweet after tax break blocked

Canadians bidding for 40 per cent of Auckland Airport had offered a type of share that would yield tax breaks.

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By Grant Bradley , 26.02.08, NZ Herald

A multi-million-dollar tax break that would have sweetened a Canadian pension fund's bid for control of Auckland International Airport(AIA) was blocked in a surprise move by the Government last night.

The urgent measure relates to what are known as stapled securities, which allow companies to pay tax-deductible interest to shareholders instead of dividends.

Changes will be retrospective and the announcement was made without prior consultation with interested parties "because it is a matter of urgency since some companies may be contemplating the issue of the type of stapled stock in question", Finance Minister Michael Cullen and Revenue Minister Peter Dunne said.

The Canada Pension Plan and Investment Board (CPPIB) planned to issue stapled securities as a "tax-efficient" device as part of its offer to airport shareholders.

The Inland Revenue Department says hundreds of millions of dollars could have been caught up in the deals if the securities had become popular.

Policy manager Emma Grigg said the Canadian proposal had not been specifically targeted but plans outlined in the company's prospectus would be covered by the changes.

The CPPIB had early yesterday been talking up the chances of its bid succeeding after a change of tack by the airport board. Last night, it said it would not respond to the tax change announcement until today.

The ministers said the change would be included in the next available taxation bill and, once enacted, would apply to stapled stock issued or stapled on or after yesterday.

"If those instruments were to become common in New Zealand the amount of debt deductions against our tax base could increase significantly. The issue becomes particularly acute if the instruments are issued to foreign investors in New Zealand companies."

The change will also deal a blow to potential earnings for Auckland councils. Auckland City Council has a 13 per cent stake in the airport and Manukau City has just over 10 per cent. Although neither is selling its shares, both were hoping to gain tens of millions of dollars a year.

A market source said "anyone who thought they were voting for this to get a tax advantage should think again".

Paul Ridley-Smith of investment company Infratil, which opposed the Canadian bid, said it looked like it was back to the drawing board for CPPIB. It has undertaken to restructure the company by way of an amalgamation process - to unlock capital and make it more tax-efficient for shareholders.

"If the Canadian deal had been done as a single transaction - which is to bring in a new shareholder, new management and change the capital structure - we had absolutely no problem," he said.

"But with the Canadian deal the restructure happens after they've got to 40 per cent. So the question has got to be asked what is the overriding commercial purpose of the amalgamation. If it is predominantly to get a tax benefit, then we would think it wasn't going to get approval from Inland Revenue."

The CPPIB had not sought an IRD ruling on the amalgamation plan before making its offer.

Prior to the ministers' announcement yesterday, the airport's board recommended shareholders sell their shares. That was a reversal of its position in December, when it advised shareholders against accepting the partial takeover bid but by a majority of 4-2 maintained its recommendation to vote against the offer.

Board chairman Tony Frankham said directors wanted to ensure nobody missed out on any premium if shareholders voted yes to the offer.

CPPIB vice-president Graeme Bevans said the change of recommendation was "fairly predictable". "They're ... a relatively new board and this is a very difficult decision."

In August last year, Trade Negotiations Minister Phil Goff dealt a fatal blow to a Dubai Aerospace Enterprise takeover bid when he said the Government did not want to see key public utilities sold off.

Shares in Auckland Airport closed up 3c to $2.83 yesterday, off its year high of $3.50 struck in July last year.

Related Share Investor reading

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Directors of AIA bribe brokers not to sell
What is Auckland Airport worth to you?
Second bite at AIA by CPPIB might just fly
AIA new directors must focus on shareholders
Auckland Airport merger deal nosedives
The Canadians have landed
AIA incentive scheme must fly out the window
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DAE move on AIA: Will it fly?

Disclosure: I own AIA shares


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