The new pensions regulator wants to curtail attempts to replace the protective cushion of equity capital with debt.Mr Green's last bid for Marks & Spencer involved proportionately far more equity than characterised by his earlier Bhs and Arcadia buys, and was therefore for him personally higher risk for less certain rates of return.You don't build a fortune as rapidly as Mr Green without taking extreme risks, but there comes an age and point of enrichment where risking all, even for some great and long-coveted prize, no longer seems worth the gamble. In theory, then, the Green family don't have to pay a penny of UK tax on their £1bn-plus dividend.Furthermore, the extra debt-servicing costs incurred in gearing up the company to pay the dividend will reduce the pre-tax profits of the company, which in turn reduces the amount of corporation tax the company pays. Clever or outrageous? It depends on your point of view, but the Revenue will certainly regard it with suspicion.As for whether Mr Green might return for a third tilt at Marks & Spencer, who knows, but even he acknowledges the difficulty of repeating the fabulous returns made out of Arcadia and Bhs. Mr Green hasn't paid himself a dividend from Bhs this year, presumably because the banks won't let him.The taxman may be getting equally alarmed. Mr Green is not a tax exile, but his wife and family, in whose names the businesses are registered, are.
Many other private-equity takeovers in the retail sector, such as Debenhams, are much more aggressively geared.Even so, there are limits to what can be extracted from these companies without fundamentally damaging the business. Mr Green's skill has rather been to ride the private-equity boom, which has allowed financiers such as himself to replace equity with debt and reap the rewards. Arcadia generated net cash in the year to the end of August of £404m, which is a lot but plainly not enough to cover a £1.3bn dividend.Instead, the money comes from bank borrowings, secured against the assets and the cash flow of the business. It is bankers and other debt holders who have paid him the dividend. As a consequence, they also assume the risk of the company being unable to repay its debts, a reminder of the old adage that when you owe the banks a few grand, you've got a problem, but when you owe them several billion, it's they who have the problem.In fact, Mr Green insists, the business is still pretty conservatively geared, since even after the payment of a £1.3bn dividend, it generates enough cash to cover its debt-servicing costs seven or eight times.
In just three short years, that comparatively small equity investment has been made to pay back £1.3bn in cash, which to save you doing the maths is a rate of return of 130 times. And Mr Green still owns the business on top.Fast back to Mr Green's purchase of Bhs five years ago and the numbers look more impressive still Mr Green put up just £15m of equity to buy Bhs. Including yesterday's dividend from Arcadia, he's now, from that original outlay, managed to pay himself back the thick end of £2bn while at the same time retaining ownership of both businesses. Few billion-pound fortunes can have been made so swiftly.How on earth has he done it? Retail flair is certainly part of the answer, but not in truth the major part.
