Two months ago, Allan Sloan wrote a column in the Washington Post about a new tax twist in corporate buyouts -- Yummy Tax Toppings Sweeten the Sale:
Of course, your refund is Uncle Sam returning an interest-free loan you graciously made him by overpaying during the year -- but it sure feels better to get a check than to write one. So imagine the joy at Great-West Lifeco, which has figured out how to get cash today for tax savings that it won't see for up to 15 years. It will do this by getting $550 million from the sale of securities backed by tax savings that it expects to get as the result of its $3.9 billion cash purchase of the Putnam Investments mutual-fund business.
Getting tax savings upfront? You gotta love it. Here's the deal: Great-West, of Winnipeg, Manitoba, is buying Putnam from Marsh & McLennan of New York.
Normally, this would be a plain-vanilla deal, with Great-West buying the stock of the M&M subsidiary that owns Putnam. This wouldn't give any U.S. tax breaks to Great-West, which has substantial U.S. profits. Instead, M&M and Great-West are adding yummy tax topping to the vanilla by making what tax techies call a 338(h)(10) election. This allows Great-West to treat the deal as if it had bought the assets of Putnam, the nation's 10th-largest fund company, rather than buying stock.
The difference? By buying assets for cash, Great-West -- perfectly legally and aboveboard -- gets to deduct what it paid for Putnam from its U.S. taxable income over the next 15 years by depreciating the assets it purchased. That would reduce Great-West's taxable income by about $260 million a year ( 1/15 th of the $3.9 billion purchase price). This deduction would save Great-West $88 million a year at the current corporate tax rate of 34 percent.
Great-West, which declined to discuss details, is doing a pioneering deal by selling securities tied to those savings. "These guys are breaking new ground," said Robert Willens, a tax expert at Lehman Brothers. "This is absolutely the first time anyone has done this."
I still have not been able to track down the details of the deal.
But now I've run into this intriguing statement that caught my eye in the Economist story on the proposed buy-out of Virgin Media -- Branson's bumpy landing:
Given Virgin Media's troubles, why would Carlyle want it? The firm offers a predictable cash flow that could be used to repay the loans needed to buy it; but there may be another reason too. Analysts at Merrill Lynch reckon Virgin Media has a “tax loss” of about £12 billion, which could be written off against profits, if Virgin made any. That could be useful for an acquirer looking to shelter earnings. Several private-equity groups besides Carlyle are also thinking hard about bidding for the media firm. Expect more twists in this suddenly unpredictable plot.
Could Carlyle, who is no stranger to the securitization process, be looking at the same deal? Carlyle was one of the buyers of Dunkin Donuts that securitized its franchise royalties (see earlier posting).
This could get very interesting -- especially as the asset backed securitization market starts going south because of the problems with sub-prime mortgages. (Just yesterday, S&P announced it is looking at its ratings for the residential mortgage backed securities. See also Ratings Cuts By S&P, Moody's Rattle Investors - WSJ.com)
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