Retail Supermarket wars Coles' secret dollar deal for Woolies store
Coles has paid $1 to officially become the owner of a $40 million Sydney supermarket leased to arch rival Woolworths, after it was caught using an elaborate tax-haven structure to conceal its identity as the owner.
The supermarket company has defended its actions as a "common" industry practice, dismissing as a "conspiracy theory" questions about the use of an offshore company to secretly act on its behalf.
Land title records show Coles paid $1 at the start of the financial year to formally take ownership of the property, rather than holding it at arm's length via an agent and trustee, Sino Ace Investment Pty, a company ultimately controlled by an entity registered in the British Virgin Islands.
Fairfax Media has previously disclosed that Coles used a labyrinthine corporate structure to conceal its involvement in the purchase transaction, blindsiding Woolworths to become the landlord of the 4282 square metre supermarket site in Neutral Bay. The Grosvenor Street outlet is one of Woolworths' best-performing supermarkets in the country.
In the fiercely competitive supermarket industry, buying a high-performing store from under a competitor's nose is known as a "black truffle", as is the Holy Grail of retailing.
It is understood Woolworths was livid when it found out Coles was the new landlord, giving it automatic access to Woolworths' sales data under the lease terms.
Coles claims the convoluted method used in the deal is commonly used by property developers and retailers to "manage the risk of big buyers attracting a bigger than necessary acquisition premium".
"This is a sensible commercial strategy to get the best possible commercial outcome," a Coles spokesman said.
Woolworths said it was "not common practice" and Coles had ultimately made a poor investment in a bid to get one up on its rival.
"Coles have paid $40 million for the property. We estimate they paid 30 per cent over market value for it [and] they would have about a 4 per cent yield, at the lowish end," a Woolworths' spokeswoman said.
Coles said it had been "fully transparent" with NSW revenue authorities about the transaction and had paid all requisite taxes and charges. Bank cheques were given to Sino Ace Investment to pay the $2.18 million stamp duty and to make settlement on the deal.
The Chief Commissioner of State Revenue has confirmed that sale documentation has been reviewed and the correct amount of duty has been paid.
However, in an admission that could raise concerns about Coles' due diligence processes, a company spokesman now says Coles was unaware it was dealing with a company ultimately based in the British Virgin Islands.
"Coles appointed a company incorporated in Australia to act as agent and trustee for Coles. Based on a company search it appears the BVI [British Virgin Islands] incorporated company owns all the shares in the Australian incorporated company," he said.
Documents held by the Australian Securities and Investments Commission show Sino Ace Investment was registered by Sydney lawyer Bernard Hang Man Chiu on December 20, 2011, one day before the Neutral Bay site was bought. The local company is wholly owned by Sino Ace Investment Ltd.
In March, Fairfax Media uncovered Coles' involvement in the deal through leaked board papers that also showed the group had spent $40 million on the purchase, setting a record price for a free-standing supermarket in Sydney. Woolworths was unaware Coles was its new landlord until told by Fairfax Media.
Five days before the purchase, a group of Coles executives carried out a massive review of its property portfolio to see what properties might be vulnerable to a tit-for-tat response by Woolworths if it became aware of the deal. The analysis showed Coles had 120 stores with a combined turnover of $3 billion that could be vulnerable.
The lease for the busy Neutral Bay supermarket ends in 2014 but Woolworths confirmed it would take up an option to extend the lease for 10 years. Under the terms of the lease, Coles has the right to inspect Woolworths' sales records for the outlet.
The property play takes place against a backdrop of a savage war between the supermarket chains, including a milk and bread war and an investigation into their actions by the Australian Competition and Consumer Commission.
Mr Chiu did not respond to a request for comment.