After months of planning and negotiating, Janus Capital is ready to sell the bulk of its shares in DST Systems back to that firm. Janus Capital owns a one-third stake in Kansas City-based DST. It has been seeking a way to sell the 40 million shares it owns since it was created through a restructuring of Stilwell Financial last year. Janus plans to use the cash raised by the sale to reduce it $840 million of debt.

One sticking point in a sale had been how to structure the deal to limit resulting tax liabilities. Absent special planning, those liabilities could reach up to $280 million, according to a published report. The solution hit upon by the two firms was reported on by Reuters and was explained by Girard Miller, chief operating officer of Janus.

Miller said the fund firm believes that the deal qualifies as a tax-free exchange under Section 355 of the Internal Revenue Code and that it will require approval from two tax consultants to move forward. He added that Janus has intended to obtain preapproval from the IRS for deal under the Section 355, but could not after the IRS stopped offering preapproval for Section 355 exchanges earlier this year.

The plan calls for Janus to exchange 32.3 million of its shares in DST for shares in DST Output Marketing Services Inc., a printing and graphics design unit of DST Output Solutions. That unit, which had $106 million in revenue in 2002 and employs 420 workers in four states, will be renamed as JCG Partners. As part of the deal, JCG Partners will agree not to compete with DST Outputs mutual fund statement and mailing business, according to the Kansas City Star. Instead, Janus plans to use the service to deliver customer account information online.

DST will transfer between $854 and $999 million in cash to the subsidiary before it is transferred to Janus. The amount of the cash transfer is dependent on the average price of DST stock during the 20 days leading up to the close of the transaction and includes a lower value of $30 a share and no more than $34.50 a share.

DST Output Marketing Services runs facilities in Long Island, New York; Chicago; Kansas City, Missouri; and Eldorado Hills, California. After it becomes JCG Partners it will commit to investing at least $15 million in its printing and graphics business. It also has agreed to repurchase between $350 million to $450 million in debt and not purchase more than $300 million worth of Janus shares over the next three years. Beyond that it may not distribute any other cash or assets to Janus Capital.

"That obviously brings us to a much better position in terms of industry comparison with our peers in the investment management business," Miller told Reuters. "It gives us financial stability going forward."

The total value of the transaction would range between $969 million and $1.11 billion, Reuters reports. The deal is likely to close in the fourth quarter of 2003 and is dependent on the approval of DST shareholders. Miller said that Janus has no current plans for the 7.4 million DST shares it will continue to own after the close of this transaction. Janus has given DST the voting rights to those shares. 

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