- Selling Centrebet shareholders can retain potential upside from the outcome of GST litigation.
- Mechanism to protect their rights includes joint committee, upfront payment of legal fees and security trustee.
- The potential upside remains difficult to value.
Providing the selling shareholders with potential upside in the event of a contingency has been a feature of relatively few takeover bids in Australia or elsewhere.
This makes the current scheme of arrangement for the acquisition of Centrebet by Sportingbet interesting as it involves a regime for dealing with a potential litigation benefit.
Under the scheme, selling shareholders will receive:
- $2 in cash per share, plus
- a pro rata share of 90% of the potential net proceeds from Centrebet’s GST litigation claim against the ATO.
The litigation claim arises out of a dispute between Centrebet and the ATO relating to the calculation of GST paid from 2006 to 2010. Centrebet claims it is entitled to a GST refund for over payments of almost $91 million.
If Centrebet wins the case, there is potential benefit of up to $91 million (before tax and the costs of litigation), of which $10.5 million would be immediately recoverable and the balance of $80.2 million would be progressively applied as a credit against any future GST payable.
If Centrebet loses the case, it will not be entitled to any refund or the benefit of any credit against future GST.
The formal documents between Centrebet and Sportingbet establish a regime for dealing with the GST claim in a way that balances the interests of the selling shareholders and the new acquirer.
This includes the following features:
- A committee consisting of two members nominated by Sportingbet and two members nominated by Centrebet will be established and be responsible for all decisions regarding the litigation, except for decisions whether to lodge or file any appeal or to settle or withdraw the claim, both of which will be determined solely by the members nominated by Centrebet (that is, the outgoing directors).
- All costs incurred in running the litigation after the scheme becomes effective will be paid from a special purpose deposit of $924,000 (approximately 1 cent per share on a fully diluted basis) and, if that is insufficient, one of the directors of Centrebet, Mr Con Kafataris (whose family owned approximately 60% of issued shares), has agreed to cover further costs.
- To align the incentives for the acquirer and the selling shareholders, the acquirer, Sportingbet, will retain 10% of any net proceeds received. This is meant to incentivise it to recover any GST benefit awarded over the shortest possible timeframe.
- There are complex arrangements which establish a contractual right and a unit trust to entitle the holder to receive distributions should the litigation be successful. An independent trustee will be appointed to protect and enforce the rights of the selling shareholders.
What is the claim worth?
The maximum potential benefit is $90.7 million (before tax and the costs of litigation). After the acquirer’s 10% interest, selling shareholders are entitled to 90% of the net proceeds received. This equates to about 90 cents per share.
However, when valuing the claim, the independent expert, Lonergan Edwards, assess the market value of the claim (using a probability adjusted DCF methodology) at $6.5 million to $9.6 million. This has regard to relevant factors such as the likelihood of success, the quantum and timing of future cash flows (the total GST refund may not be fully received until 2018) and a discount rate. Presumably, in order to preserve legal professional privilege, the expert was fairly coy when describing the merits of the claim.
The expert said:
…notwithstanding the legal opinions which support Centrebet’s position, in our opinion, a commercial person would assume a relatively low probability of the litigation claim being successful. We have formed this view after undertaking a detailed review of the litigation claim and after considering the significant uncertainty associated with the outcome. However, as the litigation claim is subject to the litigation, certain details of our assessment cannot be disclosed.
The scheme booklet disclosed that the CEO was entitled to an additional payment of $600,000 on a change of control. A remuneration consultant opined that this was appropriate, reasonable and not above market practice. The judge decided that the CEO was not in a separate class of shareholders.
The scheme was supported by shareholders and approved by court and is due to be implemented on 31 August 2011.
While we do not expect similar arrangements to become common, the Centrebet scheme provides an example of a structure that could be considered in future.