Bancroft-Dow Jones deal sweeter than you think

NEW YORK (Fortune) -- Rupert Murdoch's takeover of Dow Jones, owner of the Wall Street Journal, has gotten OJ-like coverage by us business-news types. Yet here I am, writing about it yet another time. Why? Because I'm interested in one little-noticed detail - the way selected Dow Jones shareholders will be able to defer taxes on their gains by getting $60 a share worth of News Corp (Charts, Fortune 500). stock rather than cash.

Although no one involved will say so on the record, it's clear that the tax-deferral provision was designed to attract support from the Bancroft family. The Bancrofts, you may recall, collectively controlled more than 60% of Dow Jones' voting power but didn't vote as a bloc, which allowed Murdoch to pick up enough family support to seal the deal. On paper, the tax deferral is available to any Dow Jones holders that want it. But as we'll see, if push comes to shove, the Bancrofts will get to do the pushing.

Before we proceed, a brief tax primer. If you sell stock for cash, your capital gain (or loss) on the transaction gets reported in that year's tax return. But with a properly-structured stock-for-stock exchange, you defer reporting your gain (or loss) until you sell the acquired stock.

Because the Bancrofts have owned so much Dow Jones stock for so long, they stand to benefit more from the deferral option than other holders would. Murdoch could have offered the deferral option to all Dow Jones holders by paying at least 40% of the $5 billion purchase price with News Corp. stock - the minimum normally required to allow selling holders to defer their gains. Murdoch didn't want to offer that much stock, however. (I'm not sure why; a News Corp. spokesman declined comment.)

Instead, News Corp. is offering to pay up to 10% of the price with News Corp. stock, which will generate tax deferrals even though it's far below the normal minimum. It's doing this with what tax mavens call a National Starch transaction. That's a nifty, complex maneuver named for the way that Unilever acquired - duh! - National Starch in 1978. (Unilever (Charts) has since sold National Starch, but that's a tale for a different day.)

To give you the (very) short version, the buyer in a National Starch deal sets up a new subsidiary, lets sellers get stock in it, and shuffles all sorts of papers around so that sellers ultimately emerge with the buyer's stock. News Corp. is playing this game by using a subsidiary it calls Ruby Newco.

Now, watch. The reason I say this deal favors the Bancrofts is that only a maximum of 250 Dow Jones holders will be allowed to go the Ruby Newco route. If more than 250 holders want the deferral, it will go to the holders tendering the most Dow Jones shares.

That is, to say the least, unusual. "I've never seen one of these deals where the mechanism is set up to favor the biggest holders," says Lehman Brothers tax expert Robert Willens, who's been around since before National Starch was even a gleam in Unilever's eye.

News Corp. said in its regulatory filings that it requested the 250-holder cap, but doesn't say why. The obvious reason is that having 300 or more holders would subject Ruby Newco to Securities & Exchange Commission reporting rules. Thus, the 250-holder cap makes life simpler for News Corp. - and any Bancrofts who want the deferral seem reasonably sure to get it, given that they're big holders.

The Bancrofts have already gotten a higher-than-other-holders price by having Dow Jones (soon to be part of News Corp.) pay $30 million of their deal expenses, about $1.50 per Bancroft family share. Now, they're first in line for tax deferrals, too.

I don't know if Murdoch would have paid more than $60 a share if he hadn't had to give the Bancrofts an extra $30 million or deal with the complexity and expense of setting up Ruby Newco. And I certainly don't know how many regular Dow Jones holders (if any) will get pushed out of the tax-deferral pool by Bancrofts.

What I do know, though, is that the Bancrofts, who in 1986 got permanent voting control by telling public holders that they'd treat their Dow Jones stake as a "quasi-public trust," have cut yet another special piece of the deal for themselves. I'm sure it's all perfectly legal but it sure doesn't seem right.