With the auction for its Vivendi Universal Entertainment assets expected to
reach a head on Tuesday, Vivendi Universal S.A. said Monday that it could
possibly be faced with a $2.7 billion tax bill as part of an unrelated
transaction.
Vivendi said Monday that it had received a formal notice on Aug. 21 from the
U.S. Internal Revenue Service that it was challenging the tax treatment of the
sale of 156 million shares of DuPont Co. stock in 1995 by Seagram Co. Ltd.
Seagram - which Vivendi bought in 2000 - for $8.8 billion.
Seagram used the proceeds of that sale to finance its purchase of Universal
Studios and Universal Music Group.
The IRS has claimed that Vivendi owes it $1.5 billion in taxes and an
additional $1.2 billion in interest as a result of the DuPont sale.
The IRS objection to the tax treatment of the sale is nothing new - Vivendi
issued a statement regarding that back in April and Seagram had been in
discussions with the IRS since 1998.
But the news that the French conglomerate could face a hefty tax bill
couldn't come at a more inopportune time.
Vivendi's board of directors is slated to meet Tuesday to discuss bids for
the VUE assets and could potentially pick a winner.
So far, General Electric Corp.'s NBC television unit and a group led by
former Vivendi vice chairman Edgar Bronfman Jr. are the most likely winners for
the VUE assets, with GE being most handicappers' pick as the ultimate
winner.
The GE proposal includes little or no upfront cash, according to sources.
Sources said that the Bronfman bid includes about $8 billion in cash.
'It certainly complicates things,' said Janco Partners Inc. analyst Matt
Harrigan. 'I can't imagine anyone is going to indemnify Vivendi for that amount.
But it certainly has to make Vivendi more cognizant of their liquidity
position.'
In a statement, Vivendi said it believes the tax treatment of the DuPont sale
was correct.
'Vivendi Universal continues to believe that the tax treatment is fully
compliant with US tax laws in force at the time,' Vivendi said in a
statement.
Vivendi said it expects the IRS dispute to be resolved without having a
material effect on its financial statements and that it has enough cash in
reserve to pay the tax bill.
Vivendi's April 2003 press release, the proceeds of the stock sale were
treated as a taxable dividend and, in compliance with U.S. tax law, 80% of that
amount was reported as an income tax deduction.
The tax due on the remaining 20% was paid in 1995.
