Spinoff Odds & Ends: May The Spin Be With You Edition

Lets kick off the week with a new edition of odds and ends catching up on some old items:

  1. Disney (DIS) acquired 21st Century Fox last month, but a new, slimmed down Fox Corporation (FOX) was spun off just prior to the deal closing. The new Fox is still controlled by the Murdoch family, but it is a much leaner company focused on TV stations such as Fox News, Fox broadcast and some sports stations. Despite owning a number of assets, Bloomberg’s Tara Lapachelle thinks the new company’s success hinges solely on Fox News. She cites a few stats for proof including MoffettNathanson’s Michael Nathanson’s estimate that Fox News generates ~90% of the new company’s EBITDA. Additionally, the piece points to other research showing the cable news company has cash flow margins of over 60%. Talk about some serious ‘key station’ risk, particularly in the ‘cord cutting’ age! The piece sometimes struggles in its attempts to be ‘fair and balanced’, but does note that the station benefits from an effective monopoly position over certain ‘viewpoints’. That is a position that its competitors cannot claim and also a defense against cord cutting. The new business has a lot of decisions to make, but analysts are bullish. Based on Wall Street’s average target prices, ‘Fox is set to be among the biggest gainers in the S&P 500 index over the next 12 months.’ So far it’s been a flat ride, but lets see if Fox is yet another long term spinoff winner.
  2. It’s easy to forget that the essence of a spinoff transaction is its tax efficiency. As a result, the IRS is the most important agency to follow when it comes to spinoff rules. Just ask Yahoo. Over the past year or so, the Treasury Department has shown a willingness to review ‘its approach to the active trade or business requirement that must be met for a five-year period for a business to qualify for a tax-free spinoff under Sec. 355’. The National Law Review has a much more in depth exploration of the potential impact of these changes, but in short, this could allow high R&D businesses such as pharma and maybe even tech to one day pursue spinoff transactions. Historically ‘active’ has been associated with ‘income’, but many VC and pharma businesses begin their lives as loss makers. When the IRS changed the spinoff rules surrounding REITs, the number of real estate spinoffs dramatically declined. Perhaps a rule change of this sort could open up a flood of new transaction. Also, if you’re a tax professional able to and interested in talking more intelligently about this topic (and others) feel free to reach out to us directly or comment on the site.

Disclosure: Author is long shares of DIS.