Murdoch May Get Billions by Picking Disney Stock Over Comcast Cash

(Bloomberg) -- Cash may be king but Walt Disney Co.’s stock-based offer for 21st Century Fox Inc. entertainment assets could give it a $3.5 billion edge over Comcast Corp.’s rival bid.

Comcast’s $65 billion all-cash deal could stick Rupert Murdoch and his family with an upfront federal tax bill of $2.6 billion for their 17 percent stake, compared with no taxes now for Disney’s $71 billion cash-and-stock offer if Murdoch takes his entire payday in Disney stock. That -- along with Disney’s higher offer -- means the Murdochs could net as much as $11.8 billion from Disney’s proposed deal, compared with $8.3 billion with Comcast.

The terms of the Disney deal give Fox shareholders the option to take their payment in stock or cash or a mix of the two. If a U.S. shareholder receives only shares, no gain or loss will be recognized, according to the proxy filing.

Cash proceeds, though, will be subject to a 20 percent capital gains tax plus a 3.8 percent net investment income tax, the same as for the Comcast deal, according to Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. There could also be state-level tax implications since the Murdochs reside at least part of the year in California and New York.

Comcast would need to raise its all-cash offer by 42 percent to $49.87 a share, or $92 billion total, to give the Murdochs the same immediate benefit of $11.8 billion offered under Disney’s deal, according to calculations by Bloomberg, which assume the Murdochs would take all their proceeds solely in stock and the cost-basis of their Fox holdings are negligible. In this scenario, the Murdochs wouldn’t be taxed on the Disney shares until they sold them.

Fox and Comcast declined to comment. Disney didn’t respond to a request for comment.

Hook Stock

Tax considerations make up a hefty chunk of the June proxy filing sent to Disney and Fox shareholders. One section details the maneuvering of both companies to mitigate the tax impact of Fox’s hook stock, which are shares issued by a parent company and held by its subsidiary. There are still plenty of unknowns.

“The transaction is really complicated,” said Rosenthal. “Lots of the tax consequences are uncertain.”

Whichever suitor prevails, the Murdoch family fortune will be transformed. The Murdochs own a 17 percent economic interest in Fox through a Nevada-based trust, according to the company’s 2017 proxy filing. The stake is valued at $15 billion and makes up the bulk of Murdoch’s $18.3 billion fortune, according to the Bloomberg Billionaires Index. If Disney’s current offer is accepted and the family takes all its proceeds in stock then they would have a stake of about 7.6 percent in Disney, calculations by Bloomberg show.

Regulatory Hurdles

Tax implications aren’t the only consideration for Fox stockholders. Disney has already won U.S. antitrust approval for its purchase, while Comcast’s bid could face regulatory hurdles. Shareholders may also value the stock portion of Disney’s offer if they believe the value of those shares will continue to rise. Disney shares have gained 65 percent in the past five years.

Murdoch -- whose class of shares normally give him 39 percent of the voting rights according to the company’s 2017 proxy statement -- can only vote his family’s 17 percent economic interest because Class A and B shareholders each have the same voting power in a takeover vote. He said June 20 that he favors a Disney tie-up because “this combination with Disney will unlock even more value for shareholders.”

Fox shareholders are scheduled to vote July 27 on Disney’s bid.

--With assistance from Michael Hytha, Nabila Ahmed, Christopher Palmeri and Gerry Smith.

To contact the reporter on this story: Tom Metcalf in New York at tmetcalf7@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Michael Hytha, Steven Crabill

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