Warning of conflicts of interest within the Murdoch family, a U.K. hedge fund with $5.3 billion in 21st Century Fox stock told 87-year-old Rupert Murdoch to disregard huge personal tax issues in the sale of Fox assets and consider Comcast Corp.’s potential cash offer.
“The personal tax position of the Murdoch family must be an irrelevant consideration for the board, in order for the board to comply with their fiduciary duties,” wrote Sir Christopher Hohn, managing director of the Children’s Investment Fund, or TCI, in a May 23 “Dear Rupert” letter obtained by the Inquirer and Daily News.
TCI owns 137 million Fox shares.
Hohn’s letter signals a looming takeover battle that could pit those who like the Walt Disney Co.’s tax-free stock deal — the Murdoch family and other long-term shareholders — against institutional investors such as pension funds and charities that would like to see a higher deal and cash from Comcast. These institutions may not face the same tax liability.
Fox had no comment on Friday. A company spokesman cited a comment by Lachlan Murdoch, Fox’s executive chairman and Rupert’s son, who in a recent conference call with analysts said that Fox’s board of directors was aware of their “fiduciary duties on behalf of all shareholders.” The Murdoch family trusts own 306 million Fox shares.
Rupert Murdoch, who built up 21st Century Fox for decades, agreed in late 2017 to sell a portfolio of Fox’s entertainment businesses, including its movie studio, regional sports networks, and Sky satellite-TV business, to Disney for $52.4 billion in stock.
But Comcast said this week that it is planning a higher all-cash bid for the Fox assets that analysts believe could be $60 billion — or more. A formal Comcast offer could be made in early June after a federal judge decides on whether AT&T and Time Warner can merge. Comcast disclosed its plans for a cash offer this week before Fox could rush through shareholder approval for the Disney transaction. A date for the Fox shareholder meeting has not been set but could occur in the next few weeks.
Wall Street insiders and tax experts say the Disney all-stock transaction would protect the Murdoch family from big tax liabilities because it would be considered a tax-free reorganization.
A cash deal, meanwhile, could result in 20 percent capital gains taxes and an additional 3.8 percent Medicare-related taxes enacted as part of Obamacare.
New Jersey, California, and other many other states would also tax the gains in a cash deal, said Gary Edelson, the head of the tax department at the Philadelphia law firm Montgomery McCracken. Shareholders who have owned Fox shares for a long time and bought them over a long time at a low price would make the most profits and face the biggest potential tax hit, he said.
“There could be many that would prefer a tax-free reorganization as opposed to a cash deal,” Edelson said Friday.
But the TCI’s Hohn isn’t one of them.
“We understand that you are currently not permitted to solicit offers from third parties under your merger agreement with Disney. However, should Comcast make a formal offer, we would expect the board of 21st Century Fox to immediately engage with Comcast toward evaluating their proposal, on the basis of equal and fair treatment to that of Disney,” Hohn wrote.
“We are aware that the Murdoch family has a potential conflict of interest because of capital gains tax, which could lead them to preferring a lower priced Disney stock offer,” Hohn continued.
Hohn also didn’t believe that federal regulators would reject a deal for Fox assets by Comcast or Disney.
Comcast is expected to make a formal cash offer if U.S. District Judge Richard Leon allows AT&T to acquire Time Warner Inc. Leon has said he will announce a decision on June 12.