Domain's future depends on helpful ATO ruling

The decision to proceed with the Domain separation from Fairfax Media will be subject to a number of conditions including satisfactory outcome of discussions with the Australian Taxation Office.

Macquarie Capital has been confirmed as appointed to advise on the proposed transaction.

Fairfax Media Limited today announced a strategic review of the Domain Group in preparation for Domain’s potential separation into a new Fairfax controlled Australian Securities Exchange-listed entity.

The separation would result in Fairfax continuing to own a controlling majority of Domain (between 60% and 70%), while issuing shares in Domain to Fairfax shareholders at the time the separation is implemented.

Fairfax Media has reported operating earnings of $145 million for the six months ended December 31 – down 9.9% on the final six months of 2015 – with Domain responsible for a majority of the publishing company’s earnings.

The potential separation would be expected to complete this calendar year.

Fairfax Media Chairman Nick Falloon noted that a separation would result in:

• A separately ASX-listed entity establishing direct valuation for Domain;
• Boards and management teams that will be better able to develop distinct strategies, manage capital structures and conduct investment decisions for their respective businesses; and
• The opportunity for Domain to attract new shareholders with different investment criteria.
• The current intention is that no new capital will be raised.

Post separation, Domain will incur a number of costs and adjustments not currently reflected in its segment financials.

Based on preliminary estimates, these are expected to be approximately $8 million to $10 million per annum, consisting of:

Incremental $4 million Board, listing and other costs associated with Domain becoming a standalone entity;

$4 million to $6 million reflecting the transfer of corporate costs currently borne by Fairfax but attributable to Domain, and commercial agreements with Fairfax for certain services.

Antony Catalano, Domain Group chief executive officer will continue to lead the management team.

The complicating tax matter is reportedly "taking up a lot of time inside Macquarie Capital and other advisers," the Fairfax Media Street Talk column has revealed.

"Usually, companies have to spin off or distribute at least 80 per cent of a portfolio company to its shareholders in order to qualify for capital gains tax rollover relief.

"Anything less than 80 per cent can trigger a capital gain (or maybe loss in Fairfax's case) for shareholders at the time of the spin-off, because the ownership is deemed to have substantially changed. It means a potential tax bill, along with a few shares in the new Domain."

Street Talk noted Foster's Group, Tabcorp, Brambles and Orica Ltd have pursued full-scale demergers of business units in recent years, rather than retaining stakes in their respective spin-offs.

Fairfax could apply for an individual ruling from the Australian Tax Office to skirt the laws, although dealmakers said they were rare.