Posted by: Jon Fine on April 6, 2007
Turns out I am wrong in this post when I say Sam Zell will be stuck with the Los Angeles Times (and vice versa), and that selling the L.A. Times will net him a massive tax bill.
Geffen-Zell talks regarding the L.A. Times continue, numerous outlets report. (UPDATE 4/13: Zell denies interest in selling the Times.) In the L.A. Times itself, Lehman Bros. tax expert Robert Willens says that a spin-off could get around the asset-sales/tax bill I previously mentioned. (Key parts quoted below.)
More interestingly: Tax experts from two different firms tell me that a Zell-owned Tribune could go public without triggering a monster tax bill. Judging from Willens’ comments, Zell could also do tax-free spin-offs of portions of the company.
Given all that: Someone, please, weigh in and tell us how to make this crazy deal work:
You own Tribune. In ’06 you made $1.3 billion in cash flow. Around 15% of that cash flow came from the Los Angeles Times, which, I think we can all agree, will likely decline. (And I’m not feeling so sanguine about cash flow from the next-biggest papers, the Chicago Tribune and Newsday, either.) Your total debt, after you sell the Chicago Cubs, will still top $12 billion. You have a TV group and a share in the CW network. You can do complicated tax-free spin-off sales and/or take portions of the portfolio public.
What do you do?
Sideline question #2: Is it better for the Los Angeles Times to be owned by David Geffen, the prickly local billionaire deeply enmeshed in the movie, musical, and political worlds—and who has already threatened to fire one specific business writer if and when he gets the paper, according to Slate? Or is it better to go with Sam Zell, who did such a debt-ridden deal that keeping cash flow as high as possible is of paramount importance?
Tax arcana, via the L.A. Times, follows:
The opportunities still exist to spin off The Times from Tribune in a tax-free transaction, according to Robert Willens, a tax expert and managing director at Lehman Bros. who has followed the Tribune deal closely. The ideal format, he said, would be a “sponsored spinoff,” an increasingly popular method for corporations to divest subsidiaries without incurring large tax bills.
A sponsored spinoff of The Times might allow Tribune to slash the amount of money it would need to borrow to take the company private under a Zell deal.
The spinoff might happen in several stages, Willens said. First, before a Zell deal was completed, Tribune would transfer The Times to a new company, which would then borrow, say, $1 billion, against the newspaper’s assets. Tribune could use those proceeds to offset its own debt or future borrowing. In the next step, a new partner — in this example, Geffen — would buy up to 49.9% of the Times company. The purchase would have to be for a stake of less than 50% to keep the transaction tax free. Tribune would distribute the remaining 50.1% of the stock in the new company to current shareholders on a tax-free basis.
Geffen’s purchase price would pay off the $1 billion in borrowing, with any excess going to Tribune. After an interval of as little as a year or two, Geffen could buy the rest of the Times shares, emerging as the newspaper’s 100% owner.
“It’s doable,” Willens said.