Nine's Domain tax bill a risk for CoStar deal

Media giant Nine Entertainment (ASX: NEC) faces questions about the size of a potential capital gains tax bill it may need to pay if it agrees to back CoStar's $4.20 per share takeover bid for Domain. 

Nine's latest accounts show it had just $18.9 million in capital losses to offset against any large tax bill if it sells its Domain stake in a deal that could see it raise cash proceeds north of $1.6 billion. 

The media group has consistently refused to disclose its cost basis for tax purposes of its 60% ownership stake in the real estate platform that's the subject of a takeover bid. 

IML portfolio manager Lucas Goode said it was difficult for him to speculate on the complexities of potential capital gains tax liabilities as Nine has not been forthcoming with that information, but clearly the tax outcomes will have an impact on what constitutes a good offer for shareholders.

"It's been a recurring disappointment to us as Nine shareholders that they haven't done more with Domain," he added.

"It always seemed like what can Domain do for us, rather than what can we do for Domain, which is backwards as Nine should be using its media assets to leverage Domain, which is their most valuable business. But, it's a credible bid at $4.20, I think they're in a good negotiating position, ideally I'd like a higher bid as I think Domain is worth more to Nine."

Nine declined to respond to a request for comment on its tax base cost for its Domain shares, or whether it's seeking tax advice on the bid that values the digital marketplace at around $2.7. billion. 

The secrecy over the potential capital gains tax bill comes after a takeover bid by private equity group Kohlberg, Kravis, Roberts for parts of fund manager Perpetual (ASX: PPT) fell over, after the Australian Tax Office ruled Perpetual owed $500 milllon in tax to complete the deal, which was five times larger than estimated. 

Key deal issue

Other investors are also watching Nine's moves closely. "Capital gains tax is going to be a key deal issue for Nine and Domain," said David Kingston, a veteran investment banker and former managing director of Rothschild Australia. "Nine only has $19 million of capital losses so with a sale at $4.20 per share or above, there's likely to be significant capital gains tax payable.

"The actual tax payable is not clear as Nine has not disclosed its cost base for Domain", said Kingston.

Another investor, who spoke on condition of anonymity, said he expects Domain's board will reject the $4.20 per share bid to angle for a higher offer. 

"The tax basis is critical to the outcome and in terms of proceeds to Nine. The market wants Nine to sell Domain at a correct and appropriate value", the investor said.

“And Bruce Gordon at 25% is crucial to the outcome. All shareholders want them to return a sizable amount of the proceeds.”

Other major shareholders in Nine include fund manager Pendal at around 7.6%. Fairfax Media and Nine Entertainment merged in 2018, after Fairfax spun out Domain in 2017 in a deal that saw Fairfax shareholders receive one Domain share for every 10 Fairfax shares held. 

On Thursday Nine shares traded flat at $1.63. While Domain, that counts Nine acting CEO Matt Stanton on its board, rose 0.7% to $4.37. Rival REA Group surged 4.3%, to $256.57.