Companies toast arrangement schemes

Allied Domecq’s merger with Pernod Ricard raises an interesting question: are
schemes of arrangement, used in this merger, becoming more popular?

Allied’s deal, Pernod says, involved no accountants working on the corporate
finance side – Pernod having been advised by Morgan Stanley and J.P. Morgan on
those issues. But Ernst & Young did advise on tax, a spokesman for Pernod
says.

Schemes of arrangement are a tax-efficient way of merging. Just as individual
share transactions attract capital gains liabilities and stamp duty liabilities
when sold, so do companies. This type of scheme avoids a direct taxable transfer
of equity.

Gerry Young, a director in corporate finance at PricewaterhouseCoopers, says
there is a definite sense, anecdotally at least, that they are becoming more
popular: ‘I think five years ago you would automatically go for an offer.’

Allied Domecq is not the only recent M&A deal to involve such a scheme.
Santander’s merger with Abbey in November was effected using the same
arrangement, allegedly saving £42m in stamp duty. Morrison’s takeover of Safeway
was also conducted through the same means.

It may be that such deals are only used for bigger purchases. For smaller
arrangements, the administrative costs of a scheme might outweigh the tax
benefits.

But there are drawbacks. Young says bidders have less control with a scheme,
since the arrangement is conducted between a target and its shareholders. With
an offer, the bidder is in control.

Another problem is the requirement to get 75% support, rather than 90%
support, means boards are deciding to squeeze out smaller shareholders.

Data from financial data company Dealogic suggests a slight increase in UK
schemes of arrangement from around $35bn (£20.2bn) worth of deals in 2004 to
$30bn in only the first two quarters of 2005.

It is difficult to posit a definite trend over just two quarters, but there’s
a definite sense that the method is becoming more popular.