Watson to sell tax losses

By Deborah Hill Cone

Friday 20th September 2002

Eric Watson's Cullen Investments is asking shareholders in listed Pacific Retail Group to approve a clever five-year deal to buy Cullen's tax losses.

Cullen, which owns investments in companies including finance company Hanover Group, does not need the surplus tax losses itself. But PRG is highly profitable so the proposed transaction would supposedly benefit both parties.

Under the deal, PRG could in one scenario pay Cullen up to $39.3 million of subvention payments in lieu of tax over that period, worked out using a predetermined annual formula with a discount of 12.5%.

For example, this year PRG is estimated to pay $9 million in tax but under this proposal it would pay $7.8 million to Cullen instead, giving PRG a benefit of $1.13 million.

Tax law allows for losses incurred by companies within the same group to be offset against the income of another company with the threshold for being considered part of the same group a 66% common shareholding.

PRG became part of the Cullen group for tax purposes last October, with Cullen now owning 77%. A similar structure to the PRG proposal was put in place by INL this year to use huge losses from Sky Network Television, in which it is a 66% shareholder.

But an independent appraisal report on the Cullen deal prepared by Ferrier Hodgson says the proposal is in some ways more favourable to Cullen than the Sky one is to INL.

The deals differ because parent INL pays compensation to Sky for the tax losses only if and when Sky TV becomes a taxpayer. But the PRG deal allows Cullen to get a quicker payback for its losses.

"Cullen will receive the advantage of being able to utilise its tax losses more expeditiously," as Ferrier Hodgson's report puts it.

The report also points out the risk to PRG is that Inland Revenue could disallow Cullen's losses up to four years after they had been claimed and charge PRG penalties and interest. PRG would have to seek to get this repaid from Cullen.

But the report, prepared for PRG's independent directors, Jock Irvine and Richard Reilly, finds the transaction is fair to PRG shareholders not associated with Cullen.

It takes that view on the basis that the pricing is set at 12.5% and Cullen indemnifies PRG for penalty and interest costs if losses are disallowed.

For the deal to go ahead half the shareholders who own the 23% of PRG not owned by Cullen will have to agree to it at the company's annual meeting at the end of the month.

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