The question being asked everywhere about the rumoured Kohlberg Kravis Roberts takeover of Coles is: Why can’t the present board and management do what KKR intends?

That’s a good question for the present board and management to answer, which they’re not. No doubt John Fletcher and Co will claim they are in the process of trying to get Coles up to Woolworths’s speed but they are moving more cautiously and slowly than KKR would as they have to live with the longer-term results and KKR won’t.

The quick fix generally worked by private equiteers sometimes is of lasting benefit – and sometimes is not. Plenty of companies have suffered slash-and-burn regimes that improved short-term profits at a long-term cost – but by then the executives responsible had collected their multi-million bonuses and moved on to their next victim.

And, as mentioned here on Friday, KKR has a potential incentive not open to existing management or any local would-be raider: tax free status. I’ve sought clarification on Taxation Laws Amendment (2006 Measures No. 4) Bill 2006 (TLAB4), as outlined in this Minter Ellison note, but even for Treasury, this is not a simple matter.

You can bet KKR has examined every comma, though, and will structure any bid very carefully as a foreign entity without a “permanent establishment” in Australia so that it can avoid paying capital gains tax. That makes a significant difference to the bottom line of the takeover game, increasing the attractiveness of the buy’n’flick strategy. You could call it Peter Costello’s contribution to the windfall profits and fees someone will pick up out of the deal.

Local shareholders paying CGT for selling their shares into any bid might ponder the equity of it, but that will soon be standard fare – foreign portfolio investors in our markets will be CGT free as long as they’re not playing in with real property.

Are you surprised by the silence about it when we are awash with super funds and hardly in need of offering foreigners a tax break to attract their capital? Yes, so am I, ‘tis deafening.

While Cossie didn’t want to touch the Foreign Investment Review Board issues on Friday, perhaps he could clarify whether he is happy to allow foreign private equiteers to structure themselves for tax-free raiding here.

Peter Fray

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