If you're looking for a real Mickey Mouse security, all you have to do is look at the new piece of paper that Walt Disney Co. wants you to buy. The security is what's known on Wall Street as a LYON, for Liquid Yield Option Note. It's probably more accurate to call it a Grossly Overpriced Overly Frugal Yielding note, or GOOFY. Which is what you will be if you buy it without understanding what you're buying.
The LYON, which is undoubtedly selling like Cokes in Disneyland on a hot day -- how many prospectuses open with a full-color picture of Mickey and friends? -- is a magical piece of paper. Magical for Disney, that is.
Disney is a guaranteed winner, thanks to the tax code, and the U.S. Treasury is a guaranteed loser. The investors who buy the security? They may make out if they can duck the daffy tax problems that LYON holders have. And if the dollar drops compared with the French franc.
Merrill Lynch & Co. has guaranteed to sell $1.5 billion in face value of Disney LYONs. Because they sell at a steep discount from face, the LYONs would raise about $600 million for Disney. Given the demand for this stuff, which is being sold heavily to individual investors who have grown up ingesting Disney with their mother's milk, the LYON may well roar up to $2.5 billion, which would raise about $1 billion.
Why the difference between the LYONs' face value and the money they raise for Disney? Because LYONs are like old-style U.S. savings bonds. Remember? You paid $18.75 for a bond with a $25 face value, and you got your $25 when the bond matured.
Assuming this deal, scheduled for later this month, goes off as planned, you will pay $411.99 for a Disney LYON with a face value of $1,000 that matures in 15 years. The difference between that $411.99 and $1,000 is interest, at 6 percent a year, compounded semiannually.
Keep in mind that the interest payments are deductible to corporations like Disney. Thus, if $1.5 billion of LYONs are sold and stay outstanding until maturity, Disney will get about $880 million of tax deductions over 15 years. If $2.5 billion of LYONs are sold, the deductions would be around $1.47 billion.
Now we enter tax fantasyland. Even though Disney won't actually shell out cash interest for years, it gets interest deductions beginning the day it sells the paper. Deduct now, pay later. Pretty slick, isn't it? And perfectly legal.
But just as Disney gets tax deductions for interest it hasn't actually paid, LYON owners get whacked for income tax for interest they haven't actually received. So the only sensible way to buy this security -- if it's sensible to buy it at all -- is for an individual retirement account or for the account of someone who pays no income tax.
Obviously, no one, no matter how dopey, will lend Disney money for 15 years at 6 percent. Not when 15-year Treasury securities yield about 8.5 percent and top-rated 15-year corporate bonds yield around 10 percent. So Disney is offering a sweetener -- which is where the bet against the U.S. dollar comes in.
Disney is offering "contingent interest" based on the share price of Euro Disney, a French company. You get either the contingent interest or 6 percent, whichever is higher. If Euro Disney does well, so will you.
Just how well Euro Disney must do is another question. Euro Disney, whose shares trade on the Paris Bourse, is building a Disney park in France. Its shares, naturally, are quoted in French francs. Euro Disney has a mind-blowing market value of $3 billion even though the park isn't even built yet, and it is considered by many people to be one of the most overpriced securities on Earth.
If you do the math, you see that for you to make 10 percent interest on a 15-year LYON, the already-pricey Euro Disney shares have to be worth five times as many dollars in the year 2005 as they are now. Can that happen unless the dollar falls sharply relative to the franc? Or even if it does? And remember that 10 percent is no bonanza. You can get that by buying a boring old high-grade corporate bond.
Note that Disney will pay you in cash, not in Euro Disney shares. As Bob Willens, the resident tax genius at Shearson Lehman Hutton Inc., points out, if Disney LYONs were convertible into Euro Disney shares, it would limit the interest that Disney could deduct. This way, all the interest is deductible. "Some very smart tax people helped set this up," says Willens.
Just about everything here is stacked in favor of Disney and against anyone who owns a LYON. The one good thing is that if Euro Disney's price crumbles -- which wouldn't exactly shock me -- you can get out of your LYON alive. Disney will buy the LYON from you for $553.68 in June 1995 or for $744.10 in June of 2000.
But the price of protection on the downside is a ceiling on how much you can make on the upside. If the price of Euro Disney gets high enough to make Disney uncomfortable, it can call the LYONs in for redemption and limit your profit. If Euro Disney doesn't go up much or if it falls, Disney sits there with your cheap loan.
Disney, of course, will win no matter what happens. Disney paid only $132 million for its 83 million Euro Disney shares, which now have a market value of more than $1.5 billion. If Euro Disney heads for the moon, Disney can sell some shares to raise cash to pay LYON interest and still be billions ahead.
This is a great, even a brilliant, deal for Disney, which gets tax breaks, cheap money and a chance to cash in on its Euro Disney stock without selling it. For the average person, though, this LYON could be the meanest thing that Disney has done since killing off Bambi's mother.
Allan Sloan is a columnist for Newsday in New York.