Berry Plastics Tax Receivable Agreement

Assuming that no significant changes are made to the relevant tax legislation and that we and our subsidiaries receive sufficient taxable income to realize the full tax benefits subject to the Income Tax Convention, we expect future payments under the Income Tax Agreement to be approximately $310 million to $350 million. … Based on our current estimates of taxable income, we expect to repay most of this commitment by the end of fiscal 2016. Another potential problem is that demanding investors do not necessarily understand the agreements. As a general rule, agreements justify only a few paragraphs in a company`s I.P.O. bids. Apollo receives 310 to 350 mm over time instead of zero in advance. It`s a good deal. But not all loaded transactions include this type of step-up transaction that creates new tax assets: Berry`s tax collection agreement, for example, covers existing net operating losses, not the amortization benefits generated by the IPO. The onus here is not to reap new tax advantages from the IRS: it is only a matter of assigning them by a party that does not value them (public shareholders), a party that does so (private equity). That`s the last part.

The prospectus for Berry Plastics – the main example cited by DealBook – describes its income tax application agreement in several places and quite clear. He explains what is happening – “we were wasting 85% of our current NLW tax savings on our current NPOs to our pre-IPO shareholders” – and even gives some figures that estimate that payments total between $310 million and $350 million and will be largely paid by 2016.1 It`s not that difficult. Under the model agreement, the private equity holding company transfers partnership shares to a newly created company. Transfers enhance the market value of certain items such as tax credits, operating losses, goodwill, depreciation and amortization. The related entity records the tax savings for these items. I think this story is also interesting to answer another question: why only tax wealth? Why do private equity IPSps not generally create future cash flows, sell to public shareholders the cash flows they (over) value and maintain for sponsors the cash flows that the public undervalues? The tax burden indicates that we are at a relatively early stage of this development: the tax collection agreement made perfect sense in the case of tax claims created by the sponsor just before the IPO. It has now been extended to other tax assets that have not been established by the sponsor, but which are similar: they have similar asymmetrical valuation problems and are similar in tax terms. The next step is to extend it to other assets that the market is worth less than the sponsor, but which are not tax: give the public markets everything they will pay too much for and nothing they will not do. It would be loaded. Lynnley Browning now has an interesting article in DealBook about “loaded IPOs.” The bottom line is that some private equity holding companies go public, but maintain agreements that require them to pay more than 85% of certain tax benefits they receive to their former IPO owners.

According to the argument, both are unfair – why do private equity firms receive this money and not current shareholders? – and also, y`know, opaque secret financial technique, etc. Viz.: [W]hy would have agreed by Founders Co. [i.e. sponsors] to pay taxes on the sale of shares only to provide Public Co. (and its new outside investors) with valuable tax assets? The answer is simple: Public Co. will compensate Founders Co. for the resulting tax costs. A possible and very simple compensation plan would be to give a higher price per share to new shareholders at the time of the IPO – this would reimburse Founders Co. for its tax costs and nevertheless allow investors to take advantage of the new tax assets created