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Taxes on the sale of the Titanic Assets


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On today's conference call, PRXI said that they were trying to sell the assets of the Titanic in a tax efficient manner. They also essentially said that they would be giving the bulk of proceeds back to shareholders.

 

Now... while giving the proceeds back to shareholders is pretty straightforward, I am curious as to how they can get out of paying a ton in taxes on the sale.

 

Does anyone have any insight as to what kind of tax rate they may get this down to? What about things they could do to reduce the taxes?

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The transaction can be structured as either a sale of assets or a sale of stock.  In an asset sale tax advantages accrue to the buyer (the buyer can mark-up the cost base and get extra depreciation for tax purposes), whereas in a stock sale tax advantages accrue to the seller.  Presumably they mean that they therefore intend to structure the transaction as a stock sale, but I don't have any special insight into PRXI otherwise to confirm this.

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  • 4 months later...
  • 2 weeks later...

http://finance.yahoo.com/q?s=prxi

 

Congrats to the folks still long PRXI...the operating business is actually profitable per today's earning release and they announced a non-binding letter of intent to purchase the artifacts for $189 million.

 

Lots of questions though on how the possible sale will be constructed to minimize taxes and how the proceeds will flow to shareholders.

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http://finance.yahoo.com/q?s=prxi

 

Congrats to the folks still long PRXI...the operating business is actually profitable per today's earning release and they announced a non-binding letter of intent to purchase the artifacts for $189 million.

 

Lots of questions though on how the possible sale will be constructed to minimize taxes and how the proceeds will flow to shareholders.

 

It looks like PRXI got what they wanted and structured the deal as a sale of stock of the RMS Titanic.  If they are able to affect a tax-free spin-off the RMS Titanic shares, there would be no corporate level taxes, and current shareholders would be then be taxed at the appropriate cap gains rate based on their holding period.  I see approx $3.85 per share proceeds on the RMS stock sale, and shareholders will be left with the operating business which appears to finally have turned the corner and looks to be profitable.  Risk of deal not closing remains. 

 

From the 10-Q:

 

"On October 15, 2012, the Company announced that it had entered into a non-binding letter of intent with an entity representing a group of individuals (the “Consortium”) working to effect a purchase of the stock of RMS Titanic, Inc., for educational, regional economic development and cultural purposes for a price of $189 million. The letter of intent is confidential, and is subject to the parties negotiating binding purchase agreements, obtaining requisite financing commitments and other approvals. The letter of intent represents the first formalization of the process in which the Company and the Consortium seek to combine efforts to place the Titanic assets in a permanent home and to monetize the assets for the benefit of the Company’s shareholders. The execution of the letter of intent does not guarantee that a purchase will be consummated with the Consortium. The letter of intent is designed to allow the Consortium the opportunity to secure its financing sources, prepare to handle and house the collection of artifacts and to continue its efforts to establish public and private support for the venture. "

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I guess I have a very very small short position in PRXI... basically I think that the auction failed to meet the reserve price and that the artifacts won't fetch a lot of money.

 

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The section in the 10-Q about the non-binding letter of intent seems incredibly vague.  Is the buying party serious or are they just window shopping?  Either is possible considering that the letter of intent is non-binding. 

The $189M price tag seems high.  Premier probably would have sold the artifacts for that price in a heartbeat in the Guernseys auction.  (Davino's contract and his transaction bonus suggests that the original plan was to sell the artifacts quickly... Premier was willing to pay him a big bonus if a sale went through.)  My guess is that a buyer can buy the artifacts for far less than $190M/189M (the court appraisal value for the artifacts was $190M... 189 is just one short of that).

 

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The latest 10-K has a section that states that the old CEO will get a bonus if the artifacts are sold.  The last two 10-Qs do not contain any mention of Davino's transaction bonus, unlike the last 10-Q.  This may or may not suggest that his bonus is unlikely.  The anticipated sale price may be very low, no sale is anticipated, or the anticipated sale date may be later than April 30, 2013.

 

The 10-K:

Titanic Artifact Sale Transaction Costs

 

The Company is party to a Consignment Agreement with Guernsey’s auction house to sell the Company’s Titanic artifacts and related intellectual property. If and when a transaction is closed, the Company will be required to pay Guernsey’s a fee of up to 8% of the sale price if a purchase agreement is entered into within 60 days of the auction deadline, and up to 4% of the sale price if a purchase agreement is entered into thereafter. The actual amount of the commission will depend on the sale price, identity of the purchasing party and the date when the sale is closed. In addition, if and when a transaction to sell the Titanic artifact collection is closed, the Company may be required to pay a Transaction Bonus to Christopher Davino, former President of RMS Titanic, Inc., dependent upon the sale price, identity of the purchasing party and the date when the sale is closed. If a Transaction Bonus is paid to Mr. Davino, it is expected to be in the range of $625 thousand to $5.25 million, as previously disclosed by the Company. In addition, the Company expects to incur other legal, accounting and investment banking expenses if and when a sale of the Titanic artifacts is completed.

 

Davino's employment contract:

 

http://www.sec.gov/Archives/edgar/data/796764/000095012311101204/c25374exv10w1.htm

 

If an agreement to consummate the sale is within 12 months of his date of termination (April 30 2012 I believe), then he is entitled to a bonus.

 

*Disclaimer: Obviously I am incredibly biased here!

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  • 2 months later...

The section in the 10-Q about the non-binding letter of intent seems incredibly vague.  Is the buying party serious or are they just window shopping?

 

ItsAValueTrap,

 

From the 10-Q (excerpt also posted by onyx1):

 

The letter of intent represents the first formalization of the process in which the Company and the Consortium seek to combine efforts to place the Titanic assets in a permanent home and to monetize the assets for the benefit of the Company’s shareholders. The execution of the letter of intent does not guarantee that a purchase will be consummated with the Consortium.
(emphasis supplied)

 

The odds of this being made public without there being serious interest, given that Mark Sellers is PRXI's Chairman of the Board, are somewhere between zero and none in my opinion.

 

With respect to timing and other obstacles that may stand in the way of this deal, it'd be worthwhile considering the implications of this announcement.

 

   

The $189M price tag seems high.

 

Seeing as it is virtually at the independently appraised value, I don't see why it seems high.

 

 

Premier probably would have sold the artifacts for that price in a heartbeat in the Guernseys auction.

 

Possibly, although why that matters in a deal about 6 months later is unclear.

 

Davino's employment contract:

 

http://www.sec.gov/Archives/edgar/data/796764/000095012311101204/c25374exv10w1.htm

 

If an agreement to consummate the sale is within 12 months of his date of termination (April 30 2012 I believe), then he is entitled to a bonus.

 

That's true only if the buying party was identified during Davino's employment period. If it takes longer (from the employment contract you posted):

 

In the event that a Transaction does not close within the deadlines that would otherwise trigger a Transaction Bonus due to reasons beyond the Executive’s control, but a Transaction subsequently closes, the Board will consider, in its reasonable judgment, whether to pay Executive a Transaction Bonus notwithstanding the expiration of the deadlines and, if so, the amount of payment. In making this determination, the Board will consider the following factors: (a) the amount of time that has passed since the last date of the Executive’s employment with the Company; (b) the extent to which the Executive played a personal role in securing a definitive purchase agreement; and © the status and development of the Transaction at the time the Executive left the employment of Company. In considering these factors, the Board will determine in its discretion whether to reinstitute all or a part of the Executive’s entitlement to the Transaction Bonus

 

 

*Disclaimer: Obviously I am incredibly biased here!

 

Quite.

 

Best,

Ragu

 

Disclosure: Long.

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Seeing as it is virtually at the independently appraised value, I don't see why it seems high.

If you were willing to pay $189M, you probably would have won the Guernsey's auction.  (In my opinion.)  That is why I am saying that it is too high.

 

Secondly, and this is the reason why I didn't go long PRXI when I first saw it on VIC (I guess I missed a lot of profits), is that the independently appraised value is for the collection if it were broken up into individual pieces without covenants attached (must preserve artifacts, public exhibition, etc.).  Premier's lawyers fought very hard for the right to break up the collection and not being forced to sell it as a whole; the judge was extremely annoyed at that request judging from the tone of some legal filing (I think the link is on VIC).

I don't think that independently appraised value is necessarily indicative of the market value of the artifacts.

 

The odds of this being made public without there being serious interest, given that Mark Sellers is PRXI's Chairman of the Board, are somewhere between zero and none in my opinion.

I find the lack of transparency in their conference calls weird... like they are trying to hide something.  But of course, this is just speculation.

 

At the end of the day... my short thesis boils down to: auction failed, they didn't meet the reserve price (whatever it was).

 

Disclosure: Long.

We'll see who's right!

 

Cheers

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I don't think that independently appraised value is necessarily indicative of the market value of the artifacts.

 

ItsAValueTrap,

From the news release pertaining to the 2010 ruling proposing a salvage award to PRXI for the 1993 and later artifacts (the pre-1993 artifacts and intangibles make up the remainder of the value totaling $189 million):

 

The Company has been awarded 100% of the fair market value of the artifacts, which the Court set at approximately one hundred ten million dollars.
(emphasis supplied)

 

It'd be odd if the Court set a price without accounting for any possible covenants/conditions.

 

I find the lack of transparency in their conference calls weird... like they are trying to hide something.  But of course, this is just speculation.

 

It's the first time I've heard any reservations about management integrity at PRXI post Arnie Geller. I suspect that most of the reticence with respect to information is because the courts are involved, but to each his own.

 

At the end of the day... my short thesis boils down to: auction failed, they didn't meet the reserve price (whatever it was).

 

The assumption implicit in that thesis is that the Consortium for this bid was in place at the time of the auction. I am not sure that is a given.

 

We'll see who's right!

 

I expect we won't have to wait long to find out.

 

Best,

Ragu

 

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It'd be odd if the Court set a price without accounting for any possible covenants/conditions.

 

I believe the court ordered an independent appraisal of the artifacts that did not take into account the covenants/conditions.

1- Appraisals are just a guess anyways.  The artifacts could sell for far more or far less than the appraised value.

2- I could be wrong here, but I don't think that all of the covenants were hammered out at the time.  Premier's lawyers at the time were still trying to get permission to break up the collection and sell what they weren't using for the Titanic exhibits.

3- Premier isn't entitled to $110/$190 million... maybe the news release isn't that clear.  As it stands currently, Premier is entitled to the artifacts provided that they meet certain covenants.  And it can sell them with covenants attached to them (the court has to approve the sale).

If Premier wanted cash, the Court could sell it for them and give Premier the proceeds... whatever those proceeds turn out to be.

 

The assumption implicit in that thesis is that the Consortium for this bid was in place at the time of the auction. I am not sure that is a given.

 

The auction failure suggests that the approximate market value of the artifacts is below the auction's reserve price (whatever it was).  If there really *is* a Consortium of serious buyers... they are idiots for overpaying for these artifacts and I am going to get burned on my (very small) short position.

 

At the end of the day, if you really think about it, I don't think that what Premier is saying makes sense.  If they sell the artifacts for $189M *AND* they still get to exhibit the sexiest artifacts for the Titanic exhibits... then they'd be having their cake and eating it too.  And how would that deal make sense for the buyers if you aren't using the best pieces of the Titanic collection (as Premier is using them for exhibits)...?

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  • 4 months later...

A year later, it looks like Premier is *still* trying to sell the assets.

 

Here's the earnings press release:

http://www.sec.gov/Archives/edgar/data/796764/000117184313002262/newsrelease.htm

 

I have some quick analysis here:

http://glennchan.wordpress.com/2013/06/03/premier-exhibitions-4q13-closing-this-position/

 

*Disclosure:  I have no position in this stock.

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  • 2 weeks later...

A year later, it looks like Premier is *still* trying to sell the assets.

 

Yep. The consortium that had a non-binding agreement to buy the assets doesn't have the financing. For the first time since the court verdict, I feel uncomfortable about the value that will accrue to Premier on the sale of these assets.

 

I find it really, really odd that Sellers felt comfortable about making a disclosure to the SEC about this agreement with the aforementioned consortium.

 

Hands down, the worst investment I've ever made. Still holding, though.

 

Best,

Ragu

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I think the legalese has them covered.  If you read the disclosure carefully, they point out that it is:

- non-binding

- subject to financing

etc. etc.

 

In other words, it could amount to nothing.  To me, the disclosure about this anonymous consortium looks deceptive although legally they made sure that they covered themselves.

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I think the legalese has them covered.  If you read the disclosure carefully, they point out that it is:

- non-binding

- subject to financing

etc. etc.

 

In other words, it could amount to nothing.  To me, the disclosure about this anonymous consortium looks deceptive although legally they made sure that they covered themselves.

 

In what way is it "legalese" and "deceptive"?  I read it and it's very clear and written in plain English.  They say they have a non binding agreement and that financing isn't in place.  It isn't misleading in the least.  This is good disclosure. 

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In what way is it "legalese" and "deceptive"?  I read it and it's very clear and written in plain English.  They say they have a non binding agreement and that financing isn't in place.  It isn't misleading in the least.  [...].

 

Kraven,

 

I am with you on this. However, the fact that Sellers deemed this disclosure worthy to shareholders led me to believe that the bid was a bit more solid than it turned out to be.

 

Best,

Ragu

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In what way is it "legalese" and "deceptive"?  I read it and it's very clear and written in plain English.  They say they have a non binding agreement and that financing isn't in place.  It isn't misleading in the least.  [...].

 

Kraven,

 

I am with you on this. However, the fact that Sellers deemed this disclosure worthy to shareholders led me to believe that the bid was a bit more solid than it turned out to be.

 

Best,

Ragu

 

I don't understand your point.  Are you saying that the fact that Sellers disclosed it at all led you to believe the bid was more solid or that he thought what he actually disclosed led you to believe it?  If the former, he had an obligation to disclose it as a material fact and if the latter, as I said, the disclosure was good and not misleading in my view.

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It seemed to me that the bid wasn't really serious at all and that it was played up to mislead investors.  It is probably the CEO who bears responsibility for doing it.

 

If the bid wasn't serious, I don't think Premier would have waited a year to engage investment bankers. I just think they finally realized that the consortium would take quite a while to work out (if ever) because of the complexity of selling to both public and private buyers, and it was about time to look for other buyers even if it meant getting a price less than what the consortium was offering. Hopefully, we'll get a better update of the process on the call in mid-July.

 

 

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It seemed to me that the bid wasn't really serious at all and that it was played up to mislead investors.  It is probably the CEO who bears responsibility for doing it.

 

I just don't understand at all why this is the case.  He said they have a bid but that it is non-binding and subject to financing.  It's as serious as it is.  Should he say "we received a bid today from some jokers who almost certainly don't have the money to actually close the deal, but I'm disclosing it for laughs"?

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Ok we're going in circles here.  Was their disclosure written in legalese or not?  Let's just agree to disagree.

 

You seem to be long the stock so I wish you the best of luck.

 

*Disclosure:  No position in the stock.  I covered my short position and made money.

 

I have no position.  No, it was not written in legalese.  You are incorrect.  Words such as "non-binding" and "subject to completion" are clear on their face. 

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Ok we're going in circles here.  Was their disclosure written in legalese or not?  Let's just agree to disagree.

 

You seem to be long the stock so I wish you the best of luck.

 

*Disclosure:  No position in the stock.  I covered my short position and made money.

 

I have no position.  No, it was not written in legalese.  You are incorrect.  Words such as "non-binding" and "subject to completion" are clear on their face.

I agree and thought that it was pretty clear as a non native English speaker. No position in the stock either.

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If the former, he had an obligation to disclose it as a material fact and if the latter, as I said, the disclosure was good and not misleading in my view.

 

From an 8-K in April 2012:

 

Premier Exhibitions, Inc. (Nasdaq:PRXI), a leading presenter of museum-quality touring exhibitions around the world, announced that due to the level of interest in its auction of the Titanic artifact collection and the late entry of additional potential bidders, the Company has extended the deadline for the submission of bids to 5 p.m. on Monday, April 9, 2012.
(emphasis supplied)

 

It's reasonable to assume that there were bids on the table then. Shareholders got details on none of those bids. So, the material fact assumption on every bid does not seem to hold.                                                   

 

Ultimately, it's not so much that the bid didn't fructify (that was a risk all holders assumed). It's the impression that there wasn't ever a chance of it happening that has led to a lot of disgruntlement.

 

Best,

Ragu

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