Pernod Ricard cuts deal over convertible note tax dispute
Pernod Ricard has joined the list of firms cutting deals with the Inland Revenue Department to settle tax disputes over the use of mandatory convertible notes, a popular way to finance trans-Tasman acquisitions in the 2000s.
The New Zealand holding company, Millstream Equities, settled with the tax department on July 24 where it forfeited previously recognised tax losses, paid the tax liability from prior periods and incurred related finance charges, according to financial statements lodged with the Companies Office. The deal meant it could unwind a $25.3 million provision it took in 2013 to cover the cost of legal claims, and instead recognised a $20.3 million tax provision in the year ended June 30.
The Pernod Ricard unit's tax expense in 2014 soared to $26.2 million, which included a $10.9 million expense for prior periods and $12 million of forfeited tax losses. That compared to a $2.9 million tax benefit in 2013.
The notes, and their close cousin, optional convertible notes, were a favourite vehicle for trans-Tasman acquisitions through the 2000s by allowing companies to juggle debt and equity in their New Zealand divisions, providing a tax advantage for their parent and a loss to the New Zealand revenue base. At issue was whether such structures were simply designed to minimise tax. The New Zealand courts decided they constituted tax avoidance, leading to a string of settlements with the IRD after a test case involving Australian firm, Alesco, settled on the eve of appeal hearings in February.
Pernod's Millstream unit narrowed the annual loss to $1.2 million from $9.6 million a year earlier, due largely to the reversal of the $25.3 million provision it had taken on the tax dispute. Revenue edged down 1.2 percent to $224.9 million, while a $27.3 million fair gain in the value of agricultural produce reduced the liquor distiller's cost of sales, and fattened gross profit to $756.2 million from $$59.3 million a year earlier. Finance costs almost doubled to $15.6 million, with other interest finance costs of $9.4 million in the 2014 year compared to $828,000 in 2013.
The company's takeover of Allied Domecq in 2005 gave it New Zealand assets including the Montana wine business. It rationalised them with the sale of a Gisborne winery, five vineyards and 12 wine brands, including sparkling wine Lindauer, to Lion and partner Indevin Group for $88.3 million in 2010.
That deal ended up in court after Lion claimed Pernod had breached warranties by not disclosing certain margin agreements with the Woolworths-owned Countdown supermarkets. In December last year the Court of Appeal upheld a ruling against Lion's claim for damages of between $6.25 million and $8.96 million.
Since then, Pernod bought Fairhall Vineyards, whose labels include Brancott Estate, in Marlborough for $16.4 million.