Here’s the sort of annoying problem James Packer and his erstwhile CEO John Alexander don’t want to have to grapple with.

While they try to convince the tax office to give them the best, lowest tax deal on the split-up of PBL, especially the payment of $2 billion ($3 a share) to shareholders, another of their cosy deals has come unstuck. And there’s every chance it will cost PBL $60 million and cut the amount of money the company receives for an unwanted asset ahead of the split.

Compared to other things at PBL, it’s small beer, but it’s annoying.

Contained in yesterday’s annual result from Perth-based newspaper monopoly, West Australian Newspapers (WAN), was the revelation of a write-down of the company’s 50% interest in the Hoyts cinema chain to $145 million.

Directors said that while the pre-tax contribution from Hoyts “rose 17.4% to $16.2 million”, this included a non-recurring item of $2.4 million relating to a gain on surrender of a lease. Excluding this one-off item, operating profit was slightly up on the prior year.

“Following a review, the board has decided to reduce the carrying value of this investment by $60 million to $145 million.”

Directors failed to note the size of the cut in percentage terms, but it was a substantial 30%, based on the book value of around $205 million.

The half share of Hoyts was bought from Consolidated Press, the private company of the Packer family in December 2004 for $173.5 million cash. WAN borrowed all the money. PBL bought the other 50% for PBL shares worth that amount which were paid to Cons Press. Here’s that announcement.

Through the usual financial alchemy of accounting the purchase price of a total of $347 million became “an enterprise value of $173 million” with “$173 million in debt”. The debt and its cost would effectively cut the value of the company and limit any capital gains tax that might be paid on the sale.

Unfortunately that’s no longer an option.

But wonder of wonders that $173.5 million value grew in the WAN accounts in 2005 and 2006, and it seems this year, despite the average to lacklustre profits the business earned.

The WAN annual accounts for 2006 show the value of its shareholding was increased to $193.34 million from $182.12 million in 2005. And then someone waved the wand over it and the 2006 figure increased to $205 million, which was then cut by $60 million, without an explanation.

Amazing.

Now WAN has suggested that it could be interested in buying the 50% PBL wants to sell, but will they buy at the $145 million value, or at a higher value?

It seems WAN chatted to a few interested parties and found that a deal could be done at $145 million rather than above $200 million. But after cutting the value of chain by 30%, would WAN really buy PBL out of the business, and provide yet another bit of largesse to the packers?

And would Kerry Stokes, the major shareholder in WAN, allow that act of charity to happen?

It’s only beans to PBL and James Packer, but it does underline how this related partly transaction went wrong in less than three years.

Cons Press picked up 11.13 million PBL shares (all okayed by shareholders) for its 50% stake and WAN was found to provide $173.5 million for the rest.

That was negotiated by John Alexander, and overseen on the board by his one-time Fairfax mentor, Chris Anderson, who is executive deputy chairman of PBL until the split happens. Anderson was the ‘lead director’ on this related party deal: he was ostensibly an independent director!

And who negotiated the WAN side of the deal? The then CEO, Ian Law, who was headhunted by John Alexander to run ACP magazines in May of 2005. That relieved Alexander from responsibility for ACP Magazines just as costs and revenue started moving in the wrong direction.

Law later became CEO of PBL Media when Packer and Alexander reorganised that side of PBL and then sold 50% to CVC, the Asian, European, American buyout group associated with Citigroup.

Law has cost WAN $60 million and now has put pressure on the price PBL can expect to get for its half interest in Hoyts. Will PBL cut its price by $60 million?

When the split of PBL was announced, the two assets slated for sale were Ticketek, sold to PBL Media for $210 million, and Hoyts, still there and unwanted, it seems.

James Packer doesn’t really care because he and his family picked up more than 11 million shares in PBL (still worth $20 million more than the value back in December 2004) and has a firmer control over the company and has picked up higher dividends in 2005, 2006 and now 2007 (more than $10 million extra). And if the split happens at $3, there’s another $33.3 million for Packer, at least.

Sweet.