We’ve been here before. The dismantling of Rupert Murdoch’s media empire began in earnest in June 2013 when News Corp completed the spin off of its publishing business as the new News Corp(NWS) and changed its own name to 21st Century Fox(FOX). That deal separated Murdoch’s declining but beloved newspaper business from the growing film and television business and left him and his family firmly in control of each. In the intervening years, the publishing business is down slightly when factoring in dividends and the media business has nearly doubled- though all of its gain has come since late 2017 when talk of a sale first hit the headlines.
Next Thursday, March 20, 2019, just after midnight, Disney(DIS) will acquire 21st Century Fox. But first, hours earlier on March 19, 2019 at 8am, 21st Century Fox will spin off Fox Corporation and distribute its shares to shareholders. Shareholders will receive one share of Fox Corporation stock for every three shares held of 21st Century Fox stock and will receive cash in lieu of any fractional share of FOX common stock they otherwise would have been entitled to receive in connection with the distribution. The information statement filed as part of Fox Corporation’s Form 10 can be found here. Fox Corporation will retain the Fox News, Fox Business, and national sports cable networks, the Fox broadcast network, 28 broadcast television stations, and the Fox Studios lot in Los Angeles, which consists of 50 acres and 1.5 million square feet of built space. It will also own six million shares of Roku(ROKU) valued at over $400 million. In fiscal 2018, these businesses recorded revenues of $10.2 billion, income before income tax benefit of $2.2 billion, and total segment operating income before depreciation and amortization, or OIBDA, of $2.5 billion. 48% of revenue was from affiliate fees for transmission of content and 45% from advertising.
Shareholders should note that, like the recent GE-Wabtec transaction, this spinoff is being treated by New Disney as a taxable spinoff, though the company says it is complex and that shareholders may take a contrary position.
The U.S. federal income tax consequences of the receipt by 21CF stockholders of FOX common stock in the distribution are uncertain. A distribution undertaken in connection with an acquisition where cash comprises a substantial portion of the aggregate consideration can prevent the distribution from qualifying as tax-free as a result of the “anti-device” requirement under Section 355 of the Code. The determination of whether the distribution can satisfy the anti-device requirement is complex, inherently factual in nature, and subject to significant uncertainty because the law is unclear. As a result, counsel cannot opine that the distribution will be tax-free to 21CF stockholders under Section 355 of the Code. Although New Disney intends to report the distribution as taxable to 21CF stockholders, 21CF stockholders will not be prohibited from taking a contrary position. 21CF stockholders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the distribution to them. Assuming that the distribution does not qualify as a distribution described in Section 355 of the Code, the U.S. federal income tax consequences of the distribution to U.S. holders of 21CF common stock will be as follows:
A U.S. holder who receives shares of FOX common stock in the distribution in exchange for a portion of its shares of 21CF common stock will generally recognize gain or loss equal to the excess of (a) the sum of the fair market value of the FOX common stock and any cash received in lieu of any fractional share of FOX common stock over (b) such U.S. holder’s adjusted tax basis in the portion of its 21CF common stock exchanged therefor. Such capital gain or loss generally will be long-term capital gain or loss if the holding period for the portion of the 21CF common stock exchanged is greater than one year as of the closing date of the distribution. The deductibility of capital losses is subject to limitations. If a U.S. holder acquired different blocks of shares of 21CF common stock at different times or at different prices, gain or loss must be determined separately with respect to each block of shares of 21CF common stock. The U.S. holder’s adjusted tax basis in the shares of FOX common stock received in the distribution will equal the fair market value of such shares at the time of the distribution and the holding period for such shares will begin on the day after the day on which the distribution occurs.
So, basically, it’s taxable, will be reported as taxable, and if you’re going to claim otherwise, make sure you have a good tax lawyer.
After the spinoff, 21st Century Fox holders will continue to hold the remaining assets until they receive cash and Disney stock the following day. As per the terms of the amended merger agreement, the consideration will be worth $38 per 21st Century Fox share. 21CF shareholders have until 5PM tomorrow, March 14, 2019 to elect their preference to receive cash or Disney shares. Even then, the aggregate cash consideration will be $35.7 billion, so cash and shares may be allocated pro rata accordingly. In other words, if there is oversubscription to either cash or stock, everyone won’t quite get what they wanted, but will get a pro-rated allocation of their election and the rest in the other consideration. That didn’t really simplify it, did it? If the requests for cash total 120% of the available cash, each shareholder who elected cash should get 5/6th their consideration in cash and 1/6th in stock, we believe. Let us know if or where we’re wrong.
This is one of the bigger spins and deals of 2019, and while we’ve known about it for over a year, the timing just hit us suddenly with Mexico’s regulatory approval just received. It is unusual indeed for a spinoff’s date to be announced just a week before it takes place, but that’s where we are. Please continue to share your questions with us and we will attempt to answer them as best we can.
Disclosure: The author holds shares in DIS