Comcast's all-cash bid could pit Murdoch against Fox shareholders

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05/15/2018 | 12:13 pm
Rupert Murdoch
(Reuters) - Twenty-First Century Fox Inc Executive Chairman Rupert Murdoch is used to getting his way at the company he built into a media empire. But a challenge to a $52 billion deal he put together six months ago could test his sway with shareholders.

Several Fox investors told Reuters they would be open to terminating the company's agreement, inked in December, to sell most of its media assets to Walt Disney Co if Comcast Corp follows through on its plan, revealed by Reuters last week, to launch a rival all-cash bid for as much as $60 billion.

Murdoch, Fox's largest shareholder, will be tough to win over, however. His family trust holds a 17 percent stake in the U.S. TV and movie giant and would face a multi-billion dollar capital gains tax bill if he accepted an all-cash offer from Comcast, tax experts told Reuters.

"If the deal was done exactly the same way, but for cash rather than stock, the tax liability would be mammoth," said Robert Willens, president of tax and consulting firm Robert Willens LLC. "Gains would be taxed at capital gain rates which, for a New York resident, amounts to about 30 percent."

The exact tax hit for 87-year-old Murdoch cannot be ascertained because details of his trust are not public. A Fox spokesman declined to comment on behalf of Murdoch on his tax affairs and how they would influence deal considerations.

However, sources close to the deal between Disney and Fox said the financial impact on Murdoch would be big enough for him to prefer an all-stock transaction, which would be non-taxable for all Fox shareholders.

That potentially puts Murdoch, who remains the most powerful voice inside the company, at odds with some Fox shareholders who would be open to abandoning the Disney deal if Comcast's cash offer was high enough.

"I always prefer cash deals," said Salvatore Muoio, whose New York-based investment firm S. Muoio & Co owns 26,000 shares of Fox, according to Thomson Reuters data. "The value of a cash deal is certain."

Other Fox investors said their decision would be based on the price that Comcast offered. "I would have to look at the tax dynamic and what it would mean for my taxable clients," said Mario Gabelli, chairman and CEO of Gamco Investors, whose firm owns 9.6 million shares of Fox.

Fox's large institutional investors, such as index fund managers BlackRock Inc and Vanguard, do not factor in taxes when choosing between cash and stock deals, because they are not taxed on any income they distribute to shareholders, even though this might affect some of their individual investors.

Fox, Comcast, Disney, BlackRock and Vanguard all declined to comment.

MURDOCH V SHAREHOLDERS

Murdoch's family trust controls 39 percent of Fox due to shares it holds with special voting rights.

However, under the company's bylaws, those special rights do not apply to a vote on the Disney deal, when the Murdoch trust will only have 17 percent of the vote. That makes it easier for other shareholders to defeat him in the vote, which is expected as early as next month.

Comcast made an all-stock offer for Fox's assets late last year, before Disney clinched a deal, and is now considering an all-cash offer after the value of its shares declined by 20 percent in the last six months, sources told Reuters last week. Comcast also believes it has capacity to borrow more money, according to sources familiar with the U.S. cable operator's thinking.

To be sure, Comcast has hurdles to overcome beyond Murdoch's taxes. Its all-stock bid last November for $34.41 per share was rejected by the board due to antitrust concerns, even though it was higher than Disney's $29.54 per share offer.

Sources said last week Comcast will make a new offer only if a U.S. judge allows AT&T Inc to proceed with its planned $85 billion acquisition of Time Warner Inc, which has been challenged by the U.S. Department of Justice on antitrust grounds.

Should Comcast's all-cash bid materialize, some shareholders could argue the Murdoch family should recuse itself from the deal deliberations due to the tax issue, corporate governance experts told Reuters.

"If there was a marked difference on the tax effect on Murdoch compared to other Fox shareholders, that could give rise to a conflict that would make it desirable to use an independent special board committee," said John Coffee, a law professor and director of Columbia Law School's Center on Corporate Governance. "Without information on his estate, I can't tell you if this marked difference exists."

Rupert Murdoch and his sons James and Lachlan - who are chief executive and executive chairman of Fox, respectively - participated in the negotiations and board deliberations that resulted in the deal with Disney, according to a regulatory filing with the U.S. Securities and Exchange Commission.

Although they wield outsized influence on Fox's 12-member board because of the voting power of the Murdoch trust, Fox still technically has a majority of independent directors on its board.

The only way Comcast could woo Murdoch is by offering a much higher pre-tax price for the deal compared to Disney, Willens said.

"It is not advisable for a man of Murdoch's age to engage in a taxable sale of his property," Willens said. "If he passed away while still owning the property, his heirs would achieve a basis step-up for the property, thus eliminating, forever, any capital gains tax on the appreciation in the assets that accrued during the scions' lifetime."

(Reporting by Greg Roumeliotis and Jessica Toonkel in New York; Additional reporting by Liana B. Baker in New York, Lisa Richwine in Los Angeles and Ross Kerber in Boston; Editing by Bill Rigby)

By Greg Roumeliotis and Jessica Toonkel

Thomson Reuters 2018
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