AOL is close to selling Bebo to an investor group, we’ve confirmed from a source close to the company. The price? $10 million or less. Rumors of the acquisition first surfaced this morning, and the buyer may be Criterion Capital Partners.
That’s just a bit less than the $850 million AOL paid for the social network in 2008. And as decimated as Bebo is, it’s almost certainly worth more than $10 million.
But the deal will also give AOL the ability to write off the full purchase price of Bebo for tax purposes, which we wrote about in March:
Despite that value, Aol’s best financial option for Bebo will likely be to abandon it rather than sell it, say corporate tax experts we’ve spoken with.
Here’s why – complicated corporate tax rules will let Aol write off the full purchase price of Bebo if they declare it worthless and abandon the asset. With Aol’s effective tax rate of around 45%, that’s $380 million and change in their pocket in taxes that they’d be able to avoid.
A sale of Bebo would almost certainly be less attractive. If someone were to pay them $100 million for the service, which is optimistic, Aol could still offset the remaining $750 million as a tax loss. But it could only apply against long term capital gains, and Aol doesn’t have any to offset against. They’d have to carry that loss forward and hope for future gains to offset it against.
One corporate tax attorney we spoke with wouldn’t discuss Aol specifically, but did confirm the logic of the approach. Bryan Smith, a partner at Perkins Coie, says “Without getting into any specific facts or companies, it will often be more attractive for a U.S. corporation to simply shut down a subsidiary and claim a deduction for the worthlessness of the stock against ordinary income instead of selling the stock at a distressed price and taking a capital loss, which may only offset capital gains.”
In April AOL confirmed that they were going to sell or abandon Bebo. This sale, we’re hearing, still allows AOL to write off the purchase against ordinary income, meaning they may save hundreds of millions of dollars in corporate taxes.
We’ll update with more information as we get it.