Nine's Domain tax bill could reach $240 million if CoStar agrees deal

Media giant Nine Entertainment (ASX: NEC) faces a potential capital gains tax bill of around $240 million if property portal Domain (ASX: DHG) agrees to a $4.20 per share takeover bid by US investor CoStar, according to market sources.

Nine owns 60 per cent of Domain and the tax bill on any share sale means the after-tax value of CoStar's offer to the media group's shareholders may be as little as $3.57 per share. 

On Monday, Domain shares changed hands for $4.41 at an unusual 5% premium to the takeover bid price, as traders and hedge funds bet on CoStar lifting its offer as it faces push back from Domain's board partly on tax issues. 

Nine owns close to 380 million Domain shares and its estimated bill works out at 15 or 16 cents per Nine share based on the media group's 1.5 billion shares on issue and a tax bill around $240 million. 

Any special dividend Nine paid out from the gross proceeds would likely have franking credits attached assuming it paid the capital gains tax on the Domain sale. Nine said it would not comment.

Sources added this deal is far less likely to fall over on a tax shock than Kohlberg Kravis Roberts' bid for part of Perpetual (ASX: PPT), where the asset manager believed it had structured the deal to minimise tax before the Australian Tax Office took a different view. 

Trawling accounts

Nine's accounts don't break out the cost base or book value of its Domain shareholding, although it acquired 60% via the acquisition of Fairfax Media in 2018. 

Its tax cost base for Domain is equal to net assets plus goodwill (Domain's intangible value) acquired under the transaction, said market sources. 

Domain's financial accounts are consolidated into Nine's as it's deemed to have a non-controlling interest (NCI) and the sprawling media group's financial 2019 balance sheet booked total NCI as $185.3 million from $860.6 million of total net Fairfax assets.

To reach the tax base cost for Domain, the NCI total of $185.3 million needs to adjust for the 40% of Domain it did not own and the 45% of Macquarie Media (ASX: MRN) it did not own. 

After backing out these stakes sources said Nine's maximum tax cost base stake excluding goodwill is likely around $159.8 million assuming nil assets are attributed to any other minority interest in its subsidiaries. 

As at December 31 2024, Nine had allocated $636 million in goodwill for the current cost base of Domain to take its total tax cost base to $795.6 million, sources said. 

To reach the estimated capital gains tax bill of $240 million the tax cost base of $795.6 million is subtracted from the value of Nine's Domain interest at the $4.20 per share offer, which is $1.59 billion. 

The difference - or estimated capital gain - of $797.6 million equals a bill of $239.3 million when applying a 30% tax rate. Assuming a higher tax scenario where the value of the NCI assets is lower the bill could reach $268 million. 

Nine's management has consistently pushed back on investors' requests for it to disclose more on its tax liabilities.