Disney’s Tax-Free Retreat from Radio

In its exit from the radio business Walt Disney Co. passed up a big payday but also a huge tax bill – and perhaps a lot of hassle in sorting out the relevant numbers. Disney is using a reverse Morris Trust transaction, spinning off 22 stations and the ABC radio networks to its own shareholders who will immediately merge the resulting company into Citadel Broadcasting Corp. The tax-free deal was valued at $2.7 billion but trade estimates are that Disney could have gotten anywhere from $3 billion to $3.5 billion had it sold the business for cash but given up at least a third of the take in federal taxes. Estimates were that the stations, which include several powerhouse outlets in New York, Chicago, Washington, Detroit, and other cities, would have sold for 15 to 16 times cash flow if marketed individually and 14 times cash flow if divested in a package. Tough to peg tax basis But nailing down a basis for paying the taxes isn’t easy. The tax basis for a station is the price “in the last taxable transaction in which it changed hands,” says Robert Willens, a Managing Director at Lehman Brothers. The radio station market is very active, with stations frequently changing hands. But if the deals are tax-free, a basis may be hard to figure or very low, a prescription for maximizing the tax bill. Some of the ABC stations have changed ownership a number of times. The basis in some stations “may be quite low, which explains why it was done in a Morris Trust transaction,” Willens adds. The Disney format may become a model for other industries where sales are frequent and divestors could face huge tax bills because of low bases. Disney still will walk away from the deal with considerable cash. It will “retain” between $1.4 billion and $1.65 billion, depending on the price of Citadel’s stock when the two-pronged deal is completed, and that amount is shielded from taxes. To meet federal requirements for a tax-free arrangement, Disney shareholders will own 52% of Citadel, which will become the third-largest radio group in the United States. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com