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FIRB to consider tax impact of Asahi's $16b CUB acquisition

Sue Mitchell
Sue MitchellColumnist

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The Foreign Investment Review Board will take a close look at Japanese brewer Asahi's financing and tax mitigation practices in Australia before it approves the $16 billion acquisition of Carlton & United Breweries.

Asahi said on Monday it planned to finance the deal by raising up to ¥200 billion ($2.6 billion) in equity to refinance an initial ¥1.2 trillion ($15.8 billion) bridging loan.

The massive interest bill on the remaining debt is likely to wipe out most of CUB's annual earnings, cutting the tax bill of Australia's largest brewer.

According to accounts for ABI Australia Holdings, the local holding company for AB InBev's Australian operations including CUB, earnings before interest and tax fell 24 per cent to $872 million on sales of $2.3 billion in the 12 months ended December 2018.

The FIRB is likely to scrutinise Asahi's financing of Carlton & United Breweries and the implications for tax revenues.  Louie Douvis

Finance costs on borrowings of $10.6 billion (including a $7.9 billion related party loan) were $513 million, leaving the company with pre-tax profits of $528 million.

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After $130 million in tax, representing an effective tax rate of 14.9 per cent, net profits rose 20 per cent to $398 million.

Asahi Australia executive chairman Peter Margin said it was too early to say how much debt would reside in CUB after the acquisition.

"It will clearly depend on the final capital structure the parent company wishes to put in place," Mr Margin said.

But judging by the capital structure of Asahi's Australian business, which makes Schweppes and Pepsi soft drinks, Spring Valley juices, Cool Ridge bottled water and Mountain Goat beer, the Japanese brewer is likely to look at tax-effective ways to maximise returns from its latest acquisition.

According to Asahi Australia's accounts, the company earned $101.5 million before interest and tax on revenues of $1.8 billion in the year to December 30, 2018, but paid $84.8 million in finance costs, reducing its pre-tax profit to just $18.4 million.

At least $80 million of the finance cost was interest or ''dividends'' on $816.6 million in redeemable preference shares, which were issued on December 29 to repay an $816.6 million interest-free related party loan from Asahi Group. This suggests Asahi Australia is paying almost 10 per cent interest, even though its parent's external interest rate is around 1.4 per cent.

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The preference shares boosted the beer and soft drink manufacturer's equity, helping it comply with thin capitalisation rules, but the coupon on the preference shares significantly reduced Asahi's taxable income and tax paid to an effective rate of just 8 per cent ($8 million tax on $101 million of EBIT).

In 2017, Asahi Australia made $71.9 million in EBIT but finance costs were only $3.9 million, despite total borrowings of $1.01 billion (the $816.6 million related party loan and a $195.2 million bank loan).

The company lost $74.8 million pre-tax in 2017 after booking impairment charges of $147.2 million, taking accumulated losses over 10 years to $1.3 billion.

Asahi Australia told The Australian Financial Review it used a mix of debt and equity to invest in and fund its operations in Australia and New Zealand.

"The amount of debt from the parent company into Australia has always been appropriate for the commercial operations," a spokeswoman said.

"The debt was subsequently repaid at the end of 2018 to simplify the funding arrangements and support future growth."

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Asahi's financing arrangements for CUB are likely to be scrutinised by the Foreign Investment Review board when it considers whether to approve the $16 billion deal.

Under the Foreign Acquisitions and Takeovers Act, the government must consider the impact of a foreign investment proposal on tax revenues.

Mr Margin dismissed suggestions Asahi's approach to tax was aggressive.

"I don't think it's aggressive financing but I think the FIRB will be pretty pragmatic in working through any review of this or any other transaction," he said.

The Treasurer has 30 days to consider an application and make a decision, and may also extend this period by up to a further 90 days by publishing an
interim order.

Sue Mitchell writes the fortnightly Window Shopping column for the Financial Review and has covered retailing for over 30 years. Connect with Sue on Twitter. Email Sue at smitchell2045@gmail.com

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