Citigroup takes over EMI, loses £2.2bn
- Thread starter Fusion
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Leveraged buyouts, as favoured by PE groups like Terra Firma essentially reduce the taxman's take by replacing the amount of corporation tax a company pays with debt interest used to fund the takeover. E.g.
Company A makes £1bn profit, pays say, £200m in corporation tax
PE Group X has £4bn and borrows £10bn to buy company A, transfers debt to company A
Company A now an extra £10bn in debt, pays £500m a year extra in interest.
Company A now only makes £500m profit a year, pays £100m corporation tax.
PE Group sells Company A for £8b, still makes a £4bn profit because debt remains on Company A.
So while there's not a direct link between PE activity and increased taxes for us there is a link between PE activity and reduced tax take from corporations, which could well mean increased taxes for us
Company A makes £1bn profit, pays say, £200m in corporation tax
PE Group X has £4bn and borrows £10bn to buy company A, transfers debt to company A
Company A now an extra £10bn in debt, pays £500m a year extra in interest.
Company A now only makes £500m profit a year, pays £100m corporation tax.
PE Group sells Company A for £8b, still makes a £4bn profit because debt remains on Company A.
So while there's not a direct link between PE activity and increased taxes for us there is a link between PE activity and reduced tax take from corporations, which could well mean increased taxes for us
Leveraged buyouts, as favoured by PE groups like Terra Firma essentially reduce the taxman's take by replacing the amount of corporation tax a company pays with debt interest used to fund the takeover. E.g.
Company A makes £1bn profit, pays say, £200m in corporation tax
PE Group X has £4bn and borrows £10bn to buy company A, transfers debt to company A
Company A now an extra £10bn in debt, pays £500m a year extra in interest.
Company A now only makes £500m profit a year, pays £100m corporation tax.
PE Group sells Company A for £8b, still makes a £4bn profit because debt remains on Company A.
So while there's not a direct link between PE activity and increased taxes for us there is a link between PE activity and reduced tax take from corporations, which could well mean increased taxes for us
Where is the tax on the interest the creditor gets? I can't see it in your analysis. In this case, Citigroup would be paid interest on its loan to Terra Firma. That would be part of its profits and subsequently taxed. So while TF avoids tax liability, the actual money are still paid to the Treasury in one way or another. It's about shifting the tax burden and liabilities to the companies that are bought like EMI, not so much about not paying tax at all.
Also, doesn't anyone think that since Guy was ******* by Citigroup in the valuation and then lost the legal dispute, ending up saddled with a waaaay overvalued EMI in his PE books, he decided to default on his interest payments so as to saddle Citigroup back with it? Terra Firma is not exactly a struggling business so it's interesting, if not suspicious, to see them defaulting on that particular interest payments obligation to, who else but, Citigroup. Returning the favour of overvaluation much?
EDIT: Just noticed, you said that the PE sells the company for 8b while leaving it with the debt. That would never happen, in order to get the company to such book value (or if delisted to such valuation) that would mean a lot of things have happened and debt would have to be mitigated somehow. People are not stupid to just buy a company with so much debt for such a high price. Either way, the profit that the PE makes would be taxed afterwards wouldn't it?
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The only possible link I can see that could lead to increased taxes is the potential case that a bank has made a bad business decision which led it to lose lots of money and, perhaps, the government has to step in to bail it out (to an extent). That would mean more debt for the government and thus higher taxes for us to repay it. However that would only happen in the short term because as soon as the bailed out institution got back to health the gov would sell it for good money (usually a profit), repay national debt and lower taxes.
Not that this applies to this particular example though, but in principle that's how it might work.