Fox seen selling CNN rather than spinning off despite tax bill
NEW YORK (Reuters) - If Twenty-First Century Fox (FOXA.O) succeeds in buying Time Warner Inc (TWX.N), it's likely to sell CNN and pay billions of dollars in taxes rather than go through the headaches of spinning the cable news channel off to shareholders of the merged company, according to people familiar with the matter.
Fox plans to get rid of CNN because it already operates its own namesake news network and would likely face opposition from regulators even if it wanted to keep it. Potential buyers include CBS (CBS.N) and Walt Disney's (DIS.N) ABC - two broadcast news juggernauts in search of a cable news outlet.
A sale would mean a tax hit of about 40 percent of the proceeds, which could range between $6 billion and $10 billion, according to tax experts and industry analysts. The entire sale price would be taxable because CNN is carried on Time Warner's books at near-zero, people familiar with the company said.
"That's an additional cost to the deal and that tax liability is going to reduce the amount they are able to pay to Time Warner shareholders," said corporate tax and accounting analyst Robert Willens, referring to Fox. The 40 percent figure comes from a combination of federal, state and local taxes, Willens said.
Fox isn't considering spinning off CNN, a structure that's popular with media companies when there is a dearth of buyers, according to people familiar with the matter. Time Warner recently cleaved off its magazine division Time Inc (TIME.N) as a standalone public company after a possible merger with Meredith Corp (MDP.N) fell through. Tribune Co (TRBAA.PK) also plans to spin off its newspaper assets from its faster-growing broadcast division next month.
Fox would likely face tax consequences in a spin-off as well, a person familiar with the situation said.
CNN would have difficulties as a standalone company because, unwound from a cable bundle, it would likely see its subscriber fees plummet, according to people familiar with the matter. CNN makes money from advertising sales and by charging cable companies to carry the channel.
It's currently packaged with other Turner channels such as TBS and TNT. The average price cable operators pay CNN has been steadily climbing from 50 cents per subscriber per month in 2009 to 63 cents in 2014, according to estimates from SNL Kagan.
Fox itself estimates that CNN would fetch about $6 billion to $7 billion in a sale, according to a person familiar with the matter. That would represent a low double-digit multiple of CNN's estimated annual earnings before interest, tax, depreciation and amortization of roughly $500 million, the person added.
At those prices, Rupert Murdoch's media colossus would still reap about $3.5 billion to $5 billion after paying the tax bill.
Many media assets have a low tax basis, and in CNN's case, its value has increased dramatically from when it was first acquired. In these cases, the seller is taxed on the proceeds of the gains in value.
Time Warner got CNN as part of its $7.5 billion acquisition of Turner Broadcasting in 1996, a deal that included the Cartoon Network, the Atlanta Braves baseball team and other properties.
Founded in 1980 by media mogul Ted Turner, CNN was the first cable news network in the United States and now has more than 40 news bureaus across the globe, with distribution in more than 200 countries.
Representatives from Time Warner and Fox declined to comment.
The idea to divest CNN was part of Fox's offer that Time Warner rebuffed worth $85 per share in a mix of cash and stock, which both companies disclosed on July 16.
Sources told Reuters last week that Time Warner's board was concerned about the structure of the deal because the stock that Fox had on the table was only common shares, not the special class of voting stock that gives Murdoch control.
To make a deal more appealing to Time Warner's board, Fox will have to come up with a significantly higher amount of cash, people familiar with Time Warner have suggested.
While it remains to be seen how much more Murdoch is willing to put on the table eventually, one person said Fox currently is not considering a bid above the $90 to $95 per share range.
The relatively high tax hit on CNN may play into that calculus, because it would force Murdoch to look elsewhere for additional funds for any premium.
On Friday, Fox announced a deal to sell its European pay-TV assets in Germany and Italy to BSkyB in a deal worth $9 billion. Fox holds a 39 percent stake in British pay-TV channel BSkyB in a deal that will net Fox after-tax proceeds of around $7.2 billion.
Some of the cash proceeds could be used to support a potential higher bid for Time Warner, but Fox plans to be prudent in its pursuit and will likely use part of the money toward buying back shares, people familiar with the matter said.
Moody's analyst Neil Begley said he sees Fox as having enough financial flexibility to pay down debt over time, which could help it pursue a higher bid without sacrificing the company's investment grade credit rating.
"Mr. Murdoch is a smart guy. I'd be very surprised if he's suddenly willing to bet the farm here," Begley said.
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