Pre-CGT fire sale hysteria fails to materialise

A deluge of stock and business deals were predicted when Alistair Darling
announced that capital gains tax would be increasing from 10% to 18%, but as the
deadline for the new regime passed this week the deal flow did not quite meet
the CGT hype.

Dealmakers said the CGT change might have adjusted the timetable of deals,
but that in most cases transactions closed before the 5 April deadline were
already underway before the chancellor announced the higher rate.

‘Things have been bubbling along and some private equity houses have been
working day and night to beat the deadline, but most of these deals have been
underway for sometime. CGT simply crystallised the deadline,’ Ernst & Young
private equity partner John Cole said.

David Brooks, head of mergers & acquisitions at Grant Thornton, said
there had been ‘more talk than practice’.

‘The deals that have been done ahead of 5 April were already cooking in 2007
Q4. Some deals have been brought forward, and in some cases owners have taken
cash out of the business by buying back shares, but most deals have not been
driven by the deadline,’ Brooks said.

A similar trend appears to have emerged with listed companies. A number of
high profile executives have disposed of large tranches of shares ahead of the

Lord Sainsbury passed on 92 million shares to Innotech Advisers, a company he
controls; departing British American Tobacco executive Kenneth Clarke sold his
shares in the company; and Sir Ken Morrison moved shares he held in Morrisons
into family and charitable trusts.

Yet for at least two of them it would seem that the CGT rate was never the
main reason for some of the share transfers.

Morrisons said Sir Ken’s share deals were not driven by the CGT change and
that the tax change only affected the timing of the deals.

When Clarke, the former Conservative chancellor, sold his shares in March it
was just eight weeks before he was to step down from the BAT board anyway.

Research by Directors Deals, an organisation that tracks director dealings,
said that directors were actually buying rather than selling shares in the lead
up the CGT change as they took advantage of a weak stock market to pick up
shares in their businesses on the cheap.

The scenes of frantic CGT deal hysteria predicted by business lobby groups
have, it would seem, failed to materialise.

The relatively calm lead-up to the CGT transition will come as a relief to
Darling, but he shouldn’t feel too smug just yet.

‘If I was negotiating to sell a business in time to beat the April deadline,
I wouldn’t be in the strongest position,’ Brooks remarked.

If the new CGT rate hadn’t been introduced so swiftly, perhaps we would have
seen more CGT-driven deals after all.

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