Next Capital's Vitaco the latest to settle convertible notes tax dispute
By Paul McBeth
Sept. 30 (BusinessDesk) - Vitaco Health Group, the food supplements business majority owned by Australian private equity
firm Next Capital, has cut a deal with the Inland Revenue Department which will see it give up $29.9 million of tax
losses generated from mandatory convertible notes, which it has also pledged to unwind.
The Auckland-based company entered into a settlement deed with New Zealand's tax department on April 2 over $61.1
million of mandatory convertible notes and $24.5 million of convertible preference shares, both paying 15 percent annual
interest, according to Vitaco's 2014 financial statements lodged with the Companies Office. The deal means Vitaco will
forfeit all tax losses generated from the notes, and includes a condition to unwind both securities, specifying changes
to the conversion features of the instruments, it said.
Vitaco had zero tax losses recognised for no benefit as at March 31, its 2014 balance date, compared to tax losses of
$40.8 million for a benefit of $11.4 million a year earlier, saying the realisation of those benefits through future
profits was "not probable."
The settlement is the second this year for firms owned by Next, as the Australian private equity firm looks to exit some
of its investments, with reports Next hired UBS last year to run a sale process for Vitaco, with an initial public offer
or trade sale in the offing.
In June, the prospectus for rental group Hirepool, which Next ultimately scuttled after fund managers pushed back on
price, showed the firm also cut a deal with the IRD, forfeiting $58.6 million of tax losses generated from its use of
mandatory convertible notes.
The notes, and their close cousin, optional convertible notes, were a favourite vehicle for trans-Tasman acquisitions
through the 2000's by allowing companies to juggle debt and equity in their New Zealand divisions, providing a tax
advantage for their parent and a loss to the New Zealand revenue base. At issue was whether such structures were simply
designed to minimise tax. The New Zealand courts decided they constituted tax avoidance, leading to a string of
settlements with the IRD after a test case involving another Australian firm, Alesco, settled on the eve of appeal
hearings in February.
Among other Australasian corporates caught up have been Qantas, Transfield, Telstra Corp, Toll Holdings, and Ironbridge,
the former owners of Mediaworks, which runs the TV3 and RadioLive networks.
The Vitaco statements show the firm faced a tax expense of $5.6 million in the 12 months ended March 31, up from $1.3
million a year earlier, with cash payments of almost $4 million compared to $1.7 million in 2013.
The firm reported net profit of $13.9 million in the 2014 financial year, down from $15.3 million in 2013, with revenue
falling 5.5 percent to $169.2 million. Operational cashflow climbed to $9.3 million in the year from $5.3 million in
2013, though some $10.2 million in loan repayments left it with cash and equivalents of $954,000 as at March 31.
Next formed Vitaco in 2007, after buying Healtheries New Zealand for $62.5 million in December 2006, and Nutra-Life
Health & Fitness for $82.1 million. The Australian Financial Review speculated the unit could sell for between $250 million and
$300 million when it reported on the sale process in September last year.