The agreement governing News Corp.’s $5-billion purchase of Dow Jones & Co., generally presented in the media as an all-cash deal, actually includes an elaborate exchange-of-stock structure designed to give tax-free status to members of the Dow Jones-controlling Bancroft family.
According to tax expert Robert Willens, writing in TheDeal.com, arrangements provide for use of the “National Starch” structure, which allows certain holders to avoid taxes when they tender their shares under the deal. The structure is so named to reflect its first use in the 1978 purchase by Unilever of National Starch & Chemical.
Now, as 29 years ago, the structure is designed to create a situation in which the Tax Code’s Section 351 applies, giving tax-free treatment to a deal in which property is transferred to a corporation, as Willens said in his article, “solely in exchange for stock in such corporation provided that, immediately after the exchange, such person or persons are in control of the corporation….”
Of course, the Bancrofts — who control two-thirds of Dow Jones through their supervoting Class B shares, in a two-tier stock structure — won’t be in control of the combined corporation after the deal. But, using the National Starch structure, the News Corp.-DJ combination is designed to create a new company, called Ruby Newco LLC, that, like Dow Jones today, also will have Class A and Class B shares. News Corp. will transfer cash in exchange for Class A shares of Ruby Newco. There’s a “Merger Sub” that will be merged into Dow Jones, and when the entire deal is done, News Corp. will own Ruby Newco’s Class A, with Dow Jones Class A holders having received a taxable $60-a-share in cash.
It is with the Ruby Newco Class B, however, that the Bancrofts stand to reap their tax advantage. Says Willens, in response to a CFO.com question, “The Class B stock of Ruby Newco will be received by select Dow Jones shareholders in exchange for their DJ stock.” He adds, “The key aspect is the exchange, on a tax-free basis, of DJ stock for Ruby Newco Class B stock and the ability, once that exchange is completed, of the holders of Ruby Newco Class B stock to exchange that stock for News Corp. stock on the same tax-free basis.”
Terms call for the number of DJ stockholders receiving Class B stock in Ruby Newco (the choice of the “Ruby” name isn’t explained in the documentation) to be limited to 250, with a similar limit set on the number of Dow Jones shares that may be converted into Ruby Newco B.
“Congress has tried to make this a less attractive technique over the years,” Willens told CFO.com. “But since 1978 it’s been a standard part of the acquisition arsenal.” In cases where there are certain holders seeking tax-free status, tax attorneys structure the National Starch-style transactions carefully to adhere to the complex Tax Code guidelines.
“This is the ideal case for it,” says Willens, a Columbia Business School professor who serves as a tax and accounting specialist for Lehman Brothers. “Some holders want a tax-free exchange, but there isn’t a way to make the whole deal tax free.”
Interestingly, Willens’ article seems to be the only discussion in the media to date of the tax implications of the deal for the Bancroft family. There has been no mention, even, in Dow Jones’s flagship Wall Street Journal, which has devoted hundreds of column-inches of space to the three-and-a-half month saga since Rupert Murdoch first noted publicly that he was offering $60 a share for Dow Jones. (A Journal spokesman at first declined comment, then emailed a statement saying: “The Journal doesn’t discuss newsgathering decisions.”
The arrangement being used for the purchase of Dow Jones is a relative of the so-called double dummy technique, which Oracle Corp. used this year in acquiring Siebel Systems.
“Both the double dummy and the National Starch techniques rely on Sec. 351 of the tax code and each structure is used when (1) you want tax-free treatment for certain selected shareholders of a target and (2) the buyer is not willing to issue enough stock in the transaction such that a conventional merger would constitute a reorganization,” Willens said in response to CFO.com question. “Either structure works well. However, in the double dummy case, News Corp. would have had to become a subsidiary of a newly-created holding company and maybe that juxtaposition was unacceptable to Mr. Murdoch.”
(Full disclosure: The reporter of this article still holds 800 shares of Dow Jones stock acquired on a stock-purchase plan during his 23 years as a Wall Street Journal reporter and editor.)