With little fanfare, Sainsbury managed to spice up its bid for Home Retail Group, without paying anything extra.
When Home Retail Group finally approved Sainsbury's 1.4 billion pound ($2 billion) takeover earlier this month, it looked like it had failed to extract a sweetener in spite of two weeks of deliberations.
The financial terms of the offer hadn't changed from when the U.K. grocer formalized its bid for the Argos-owner in mid-March. But a tweak to the legal structure amounts to giving small shareholders a helpful bump on the price.
The offer was 0.321 of a Sainsbury share plus 55 pence in cash. In addition, Home Retail shareholders were allowed to keep a big dividend payment they already had coming, comprising 2.8 pence for its final dividend plus some 25 pence covering the proceeds of its recent disposal of the Homebase DIY chain.
By the time Home Retail had got round to giving a formal view on the approach, the bid had changed slightly. The dividends had gone. Instead, Home Retail investors would get the same amount they had coming from the dividend in the form of "capital returns."
This shift from paying dividends came because the deal was reconfigured from being an "offer" in the context of U.K. takeover rules to a "scheme of arrangement." It doesn't change the value that Sainsbury has to pay out. But the differing U.K. tax treatment of income and capital gains will help better-off individual shareholders.
The U.K. doesn't levy tax on capital gains up to 11,100 pounds, and even higher-rate taxpayers pay only 20 percent above this threshold. By contrast, only the first 5,000 pounds of dividend income is tax-free, and top-rate payers are charged 38.1 percent on the surplus.
The twiddle is great news for higher-earning small shareholders. It will also help certain Home Retail employees who have amassed stock under bonus or employer share savings plans -- not least the board.
Should British taxpayers feel cheated? Not really. The proceeds of the Homebase sale are a genuine capital gain, rather than income, so the treatment is hardly intellectually dishonest.
The usual benefit of a scheme of arrangement is simplicity and speed -- a deal can get rammed through with only 75 percent shareholder support. Here, the fact that Home Retail was in the middle of paying a special dividend shifted the fiscal balance in favor of such a plan. Home Retail shareholders have something to thank the taxman for.
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