Myer tax ruling dents Aussie IPOs

IFR Asia – ECM special report, June 2010

Australia’s market for new initial public offerings, already moribund, has been further dented by an Australian Taxation Office (ATO) attempt to levy a tax on foreign private equity exits.

 The transaction that triggered the ATO’s stance, and has rattled potential issuers, was the IPO of Myer in November 2009, which raised A$2.4 billion in a deal led by Credit Suisse, Goldman Sachs JBWere and Macquarie Bank. One of the groups that sold its stake in the IPO was the foreign private equity group TPG, which alongside minority partner Blum Capital owned Myer through a Cayman Islands-based entity called TPG Newbridge Myer. The partners gained A$1.58 billion from the IPO.

Shortly after the IPO, the ATO said it was pursuing TPG for a A$452 million tax bill related to the cash from the float – it went so far as to freeze a National Australia Bank account TPG held in Australia in expectation that the money was going to flee offshore (which, indeed, it reportedly already had).

 At issue is where tax on income should be paid. The ATO believes the gains TPG made from the Myer listing constituted Australian-generated income, and that income tax should therefore be paid in Australia by TPG Newbridge Myer (and another offshore TPG company, NB Queen). It is understood to be pursuing TPG for a further A$226 million in penalties for tax avoidance.

At the time of writing, the ATO had not published its final conclusions on the TPG tax situation, and was expecting to do so in late May along with final rulings on tax proceeds of private equity sales generally. The resolution of the case one way or another will have a big impact on foreign private equity appetite for Australia, and in turn for IPO volumes.

“I speak to a lot of private equity majors who are looking at Australia but I can tell you for a fact this is bothering them,” says one M&A banker at an Australian institution. “At the moment, it’s not just the question of the tax, it’s the uncertainty they really don’t like.”

Quite apart from the tax issues, the performance of recent IPOs has been miserable. After announcing an uninspiring third quarter sales result in May, the Myer share price was down more than 25% from its IPO. Another IPO late last year, for outdoor supplies retailer Kathmandu, has also fared badly. The only major IPO in Australia this year has been a A$516 million float from Miclyn Express, the marine services group; at the time of writing that was down 10% from its listing price.

Consequently private equity firms in Australia seeking an exit are believed to be looking for trade sales instead of IPOs. For example Study Group, a university programme provider owned by CHAMP and expected to raise A$600 million, and pallet maker Loscam, owned by Affinity Equity Partners and expected to raise up to A$700 million, have been reported to be heading for trade sales rather than floats. Since the real boom in private equity activity in Australia began in 2006, and firms normally hope to hold their companies for three to five years, there ought to be a host of forthcoming exits. But in this stock market environment, a number of expected floats may never happen.

Nevertheless there is a reasonably robust pipeline of equity capital markets deals expected in Australia when conditions suit, among them listings for Ascendia Retail, which operates the Rebel Sports chain of sporting equipment shops, and is believed to have appointed Bank of America Merrill Lynch, Goldman Sachs JB Were and UBS; the coal and freight business of Queensland Rail, which has been valued at A$7 billion; and Bilfinger Berger’s Australian operations.

The Myer situation fits within the context of a broader conflict in Australian commerce today: a desire to increase tax revenues (also evident in the proposed super-tax to be levied on exceptional earnings by miners in Australia) while also appearing to be business friendly and attractive for foreign investment. “The tax office and the markets don’t always appear to be coming from the same direction,” says an ECM banker in Sydney.

Nevertheless, there are already signs that foreign private equity interest in Australia will persist even if there is uncertainty about where they will be taxed on the proceeds. TPG itself, alongside Carlyle, launched a A$1.7 billion bid for Healthscope in May.