Wednesday, April 16, 2008

Newsday stock-swap sale could save Zell $245M

Sam Zell, currently $12.8 billion in debt with the Tribune Co., is reportedly structuring a possible sale of Newsday in a way that could save him hundreds of millions of dollars in capital gains taxes.

The idea of a non-cash asset swap has been swirling about talks with suitors for Newsday, including News Corp. chief and New York Post owner Rupert Murdoch and New York Daily News owner Mort Zuckerman.

In structuring any type of deal to avoid more financial liabilities, Zell may be able to save upward of $175 million on the capital gains tax and possibly more than $245 million, according to tax experts.

The calculations take into account a capital gains rate of 35 percent or higher on the difference between Newsday's current value for tax purposes, $69 million, and what it could sell for. The $69-million figure was set when the paper was sold to Times Mirror in 1970, according to several people familiar with the finances, and that didn't change when Tribune bought Times Mirror in 2000 and then went private in 2007. Media analysts estimate that the paper now could fetch $500 million to $800 million.

A master at avoiding capital gains tax, Zell could swap private Newsday stock for the suitor's stock, said tax and media analysts. Zell could then leverage his new, more liquid stock for cash, and this deal would be structured as a "prepaid forward sale" that's not recognized until the capital gains tax period is over in 10 years, experts said.

Even after that, Tribune wouldn't have to pay capital gains taxes due to special tax exemptions from its employee stock ownership plan, another Zell touch.

"You get the money up front, but for tax purposes the sale doesn't occur until the agreement matures, which in this case will be somewhat more than 10 years," said Robert Willens, a specialist in taxes and mergers and acquisitions at "When the gain actually arises for tax purposes, they will have passed the 10-year capital gains period, and it'll be tax-free."

Forward sales can help companies to reinvest in themselves, and that's why the government allows them, said Mitchell Zachary, a certified public accountant and tax partner at Grassi & Co., an accounting firm based in Lake Success. "They get the capital infusion they need," Zachary said.

There's another way to get cash out of the stock swap. "The easiest way is to borrow against it," said tax attorney Alan Kaden, a partner in Fried Frank, the law firm that represented Dow Jones when Murdoch bought the company last year. "But there are limits on how much you can borrow against it in today's market."

If Tribune defaults on its loan, experts said, the lender takes the collateral.

But any tax-free swap has to be of similar kind to be recognized by the IRS, Willens said: "It's not like you can swap Newsday for a building."

In such a swap, Zuckerman may have a less easy path than Murdoch, who has more media holdings and public stock. Most of Zuckerman's holdings are in a real estate investment trust, which requires the vast majority of income and assets to stem from real estate sources, not media. He'd need to form a "special-purpose acquisition corporation" for the purpose of buying Newsday and trading something, Willens said.

One problem in swapping assets is settling on the worth of each asset, and the negotiators can end up sounding like parents saying, "My children are better-looking than yours," said Barry Lucas, senior vice president and head of research at Gabelli & Co., an institutional brokerage in Rye.

"Who's to judge that?" Lucas said. "How do we judge? Are we going to line up Pulitzer Prizes? . . . Are we going to look at neighborhood demographics, economic buying power, average home prices in the area -- all of those things that say, 'Gee, my market is much more attractive'? . . . Those are some of the issues. It goes beyond the numbers."

Copyright © 2008, Newsday Inc.

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