One of the stock market's underlying principles is that all shareholders are supposed to be treated alike. Then there's the way that Times Mirror Co., owner of the Los Angeles Times, deals with its controlling shareholders, the Chandler family. At least three times in the past five years, the Chandlers have gotten sweet deals from Times Mirror that weren't available to regular shareholders.
The most recent touch of honey is a convoluted Sept. 3 transaction in which the Chandlers in effect sold more than half their Times Mirror stake to the company while keeping majority voting control and ducking every penny of capital-gains taxes on an indicated profit of almost $1 billion.
The problem with this deal, which neither Times Mirror nor the Chandlers would discuss, isn't that it's illegal--it's not. The problem is that dodging taxes once or twice is fine, but dodging them all the time is unseemly. Plus, the Chandlers get terms not available to anyone else. If a regular shareholder asked Times Mirror to help him sell stock at a profit without paying capital-gains taxes, he'd get tossed out the door so fast he'd break the sound barrier.
Before we discuss the latest tax-avoidance tango, a disclosure: I worked at Times Mirror's New York Newsday before joining Newsweek in March 1995, three months before Chairman Mark Willes left General Mills Inc. to join Times Mirror and promptly closed the paper. But the reason I write about Times Mirror frequently is that it's been involved in five cutting-edge tax dodges in the past 4 1/2 years. This includes two sales last year in which Times Mirror got $2.04 billion and told Wall Street it had a $1.35 billion after-tax profit but told the IRS no sale had taken place and no taxes were due.
Back to the main event. Times Mirror, which frequently exhorts the troops to hold down expenses, paid $18 million and jumped through various hoops to do the September deal. Here's what happened. Times Mirror and two Chandler trusts set up a company called TMCT II. Times Mirror put in $1.235 billion, consisting of $635 million of cash from last year's non-sale sales and $600 million of securities purchased from real estate investment trusts. The Chandlers put in Times Mirror stock valued at $1.235 billion. Both sides thus contributed equal value.
Now, the tricky part. Even though Times Mirror and the Chandler trusts each own 50 percent of TMCT II, they don't split things equally. Using what tax types call "disproportional allocation," the Chandlers get 80 percent of the income generated by the Times Mirror contribution, and Times Mirror gets 80 percent of the income from the stock the Chandlers contributed. (Each party also gets 20 percent of the income generated by its own contribution.) In effect, the Chandlers have sold $980 million of stock to Times Mirror and can use the proceeds any way they want. But they didn't have to actually sell the stock, which would trigger federal and state capital-gains taxes totaling around $275 million.
What's in it for Times Mirror? A brief surge in reported per-share earnings. Times Mirror gets to act as if 80 percent of the Chandler TMCT II stock had been retired, reducing its shares outstanding by 17 percent. This will increase Times Mirror's per-share income for a year or two, even though it will reduce overall profits. Wall Street loved the deal.
But what's Willes's next act? He talks about growth, but he keeps selling and closing properties. Tellingly, the Chandler announcement was coupled with news that Times Mirror is shedding yet more assets, including the Sporting News. Hmm. Two years ago a Willes hire who had once been product manager for Wheaties unveiled plans for the sports paper to double its circulation. Oh, well. Times Mirror spent millions of dollars in a redesign and promotion campaign, circulation rose only modestly, and Times Mirror threw in the towel.
Willes has announced plans to increase the circulation of the L.A. Times by 50 percent. Sound familiar? What's not clear--and what Willes declined to discuss--is how the L.A. Times would make money doing that, assuming it can sell all those extra papers. The problem, my gurus say: Adding circulation is very expensive, and big local advertisers typically allocate a fixed amount of money for a given paper. If ad-page rates rise, advertisers just buy fewer pages. And circulation revenue alone does not make added circulation profitable.
Meanwhile, Willes is losing Times Mirror's most profitable operator: Thomas Unterman, the tax wizard behind all these deals. He's leaving to manage the Chandlers' TMCT II money, although he'll remain a Times Mirror consultant.
The world is waiting with bated breath to see which Times Mirror asset Willes dumps next. And to see when, if ever, the Chandlers will decide to pay income taxes the way mere mortals have to, and treat other Times Mirror shareholders as well as they treat themselves.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.