Fox may sell CNN if it buys Time Warner

July 27, 2014 - 12:10:36 am


Rupert Murdoch, Twenty-First Century Fox Inc CEO (left), and his son James Murdoch at a media conference in Sun Valley recently.

NEW YORK: If Twenty-First Century Fox succeeds in buying Time Warner Inc, it’s likely to sell CNN and pay billions of dollars in taxes rather than go through the headaches of spinning the cable news channel off to shareholders of the merged company, according to people familiar with the matter.

Fox plans to get rid of CNN because it already operates its own namesake news network and would likely face opposition from regulators even if it wanted to keep it. Potential buyers include CBS and Walt Disney’s ABC —two broadcast news juggernauts in search of a cable news outlet.

A sale would mean a tax hit of about 40 percent of the proceeds, which could range between $6bn and $10bn, according to tax experts and industry analysts. The entire sale price would be taxable because CNN is carried on Time Warner’s books at near-zero, sources said.

“That’s an additional cost to the deal and that tax liability is going to reduce the amount they are able to pay to Time Warner shareholders,” said corporate tax and accounting analyst Robert Willens, referring to Fox. The 40 percent figure comes from a combination of federal, state and local taxes, Willens said.

Fox isn’t considering spinning off CNN, a structure that’s popular with media companies when there is a dearth of buyers. Time Warner recently cleaved off its magazine division Time Inc as a standalone public company after a possible merger with Meredith Corp fell through. Tribune Co also plans to spin off its newspaper assets from its faster-growing broadcast division next month.

Fox would likely face tax consequences in a spin-off as well.

CNN would have difficulties as a standalone company because, unwound from a cable bundle, it would likely see its subscriber fees plummet, according to people familiar with the matter. CNN makes money from advertising sales and by charging cable companies to carry the channel.

It’s currently packaged with other Turner channels such as TBS and TNT. The average price cable operators pay CNN has been steadily climbing from 50 cents per subscriber per month in 2009 to 63 cents in 2014, according to estimates from SNL Kagan.

Fox itself estimates that CNN would fetch about $6bn to $7bn in a sale. That would represent a low double-digit multiple of CNN’s estimated annual earnings before interest, tax, depreciation and amortisation of roughly $500m, the person added. At those prices, Rupert Murdoch’s media colossus would still reap about $3.5bn to $5bn after paying the tax bill.

Many media assets have a low tax basis, and in CNN’s case, its value has increased dramatically from when it was first acquired. In these cases, the seller is taxed on the proceeds of the gains in value. Time Warner got CNN as part of its $7.5bn acquisition of Turner Broadcasting in 1996, a deal that included the Cartoon Network, the Atlanta Braves baseball team and other properties.

Founded in 1980 by media mogul Ted Turner, CNN was the first cable news network in the United States and now has more than 40 news bureaus across the globe, with distribution in more than 200 countries. Representatives from Time Warner and Fox declined to comment.