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ALEX BRUMMER: Morrison’s private equity acquisition will HMRC . meet


As fascinating as the Pandora Papers leak about tax affairs and real estate porn from monarchs, autocrats and Tony Blair in the Middle East, it hardly comes as a surprise.

There have been mountains of this stuff, with the Panama Papers in 2016 and the 2015 revelations of rum at HSBC’s private bank in Geneva.

What should immediately worry the HMRC, the Treasury and the lying board of Morrisons is the impact of the Bradford-based grocer’s £7 billion acquisition of Clayton, Dubilier & Rice on its tax affairs.

Tax hit: Since the interest cost of debt financing is corporate tax deductible, HMRC will be lucky if it collects something from Morrison’s in the future

Rather than delving into the excited excitement over the new property and potential bids for the UK’s other grocers, a thorough look should be taken at the long-term impact of private equity deals and financially driven ownership on the UK’s revenue base .

As we know from previous high-profile deals, such as the KKR-backed acquisition of Boots and the Kraft deal for Cadbury, one of the new owners’ first steps was to change tax residence.

Even if, as CD&R has pointed out, Morrisons continues to pay corporation tax in the UK, the bill will look very different.

Before the transaction, Morrisons had nearly £3 billion in debt on its balance sheet. As a result of the bid, that number will skyrocket.

Since the interest costs of debt financing are borne by the corporate tax, HMRC may be happy in the future.

That’s not all. Everyone has been rightly encouraged that the person at the helm of the new Morrisons will be former Tesco chief executive Sir Terry Leahy.

His vision helped Tesco become a global player, although it was not shared by its humble successors.

B&M, which helped guide Leahy into the public markets, is known to have far from straightforward tax affairs for CD&R-held businesses.

When B&M hit the market in 2014, it was revealed that it was domiciled in the Cayman Islands and that founders Simon and Bobby Arora had settled in Luxembourg.

Morrisons’ place, after the acquisition, will also be in CD&R’s favorite residence of the Cayman Islands.

In private equity ownership, the company and its executives benefit from “carried interest” – a portion of profits – which is taxed at a much lower rate than income tax.

Imagine if the taxpayer were to strike if Softbank were allowed to buy the Koch-backed Fortress Sainsbury’s or any other supermarket chain.

Even if private equity’s intentions are good—building and investing—the industry’s tax affairs are opaque, exhibit an ethical vacuum, and run counter to the common good.

Public property

The billionaire Chu family that controls 71 percent of Hong Kong-cited Hopson Development Holdings is politically savvy.

A decision to acquire a 51 percent stake in Evergrande Property Services for £3.7 billion offers a lifeline for the stricken property group, weighed down by £224.3 billion in debt.

It’s the last of the Hong Kong ‘poker buddies’ to decide that a helping hand is preferable to sinking Evergrande into the China Sea, putting a damper on real estate in Hong Kong and mainland China.

Other local financiers offering some support include Joseph Lau of Chinese Estate Holdings and Henry Cheng of New World Development.

There is a lot of self-interest in that none of the billionaires will be eager to alienate President Xi, who, under the cover of the pandemic and in defiance of the “one state, two systems” regime, is stealthily seizing the reins in the power of the Hong Kong government.

The informal local bailout could soften the shock to China’s chaotic and byzantine banking sector of £37 trillion. But it’s not a great advertisement for Hong Kong’s freewheeling, capitalist future.

Bright Spark

A ray of hope for private investors who have remained loyal to Marks & Spencer through its efforts dating back to Philip Green’s takeover bid in 2004.

Despite the current supply chain disruptions and concerns about the cost of living, an October 7 update is expected to show a rise in core earnings for the half and full year.

Let’s hope it doesn’t attract the unwanted attention of private equity minds.

Chairman Archie Norman is said to be in a delicate position after he recently accepted a £1.75m signing fee from Bridgepoint as a senior non-executive director.

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