News Corp. Calls Highest Since 2009 on Carey Optimism: Options

News Corp.'s Chief Operating Officer Chase Carey
Chase Carey. chief operating officer of News Corp. Photographer: Andrew Harrer/Bloomberg

News Corp. options traders are making the most bullish bets since 2009 amid speculation Chief Operating Officer Chase Carey’s increasing influence will spur growth at the media company.

Calls to buy News Corp., the owner of Fox Broadcasting and the Wall Street Journal, outnumber puts to sell by 2.8-to-1, the most since February 2009, data compiled by Bloomberg show. The ratio has risen 27 percent this month as traders bet that the company will extend this year’s 20 percent gain and keep beating returns from rivals Time Warner Inc., Viacom Inc. and Walt Disney Co.

Carey, 58, has gained influence as the U.K. government reviews allegations that News Corp. journalists hacked into people’s phones, according to Chief Executive Officer Rupert Murdoch, who named Carey as his successor when asked who could replace him. That’s making investors more confident that the New York-based company will focus on dividends and buybacks to boost the stock price, according to Yacktman Asset Management Co.

“Chase Carey is a very capable guy,” Don Yacktman, the Austin, Texas-based money manager’s founder, said in a phone interview yesterday. Yacktman’s firm owns 4.5 percent of News Corp.’s Class A shares, data compiled by Bloomberg show. “We expect him to do what we expect out of all management, which is to be rational and do what’s in the best interest of the shareholders.”

Beating Rivals

The Class A shares rallied 5.4 percent to $17.44 yesterday. They have rebounded after falling to a 10-month low of $13.62 on Aug. 8 as London police began a probe into phone hacking at the company’s defunct U.K. tabloid, News of the World. The stock’s gain this year compares with a 13 percent advance for Viacom, 8.2 percent increase for Time Warner and Disney’s 4.4 percent loss.

Open interest for News Corp. calls has jumped 41 percent this month to 348,476 contracts, more than quadruple the 9.5 percent increase for puts, which reached 125,768 contracts.

The Chicago Board Options Exchange Volatility Index, or VIX, fell 1.4 percent to 27.41 as of 4:15 p.m. in New York and has decreased 20 percent over the past four days, the biggest four-session drop since August. The VStoxx Index, which measures Euro Stoxx 50 options, decreased 1.5 percent to close at 36.54 today.

Jack Horner, a spokesman for News Corp., declined to comment on options trading or Carey. Bloomberg LP, the parent of Bloomberg News, competes with News Corp. and its Dow Jones division in providing financial news and data.

‘Under a Bus’

“Chase Carey and I run this company as a team,” Murdoch, 80, said in an Aug. 10 conference call with reporters. “Chase is my partner. If anything happened to me, I’m sure he’ll get it immediately if I went under a bus.”

Carey was chief executive officer of DirecTV until 2009, when he returned to News Corp. He expanded DirecTV’s subscriber base to about 18 million from about 12 million at the end of 2003. Before that, he helped News Corp. expand its television business internationally and led talks for the Fox network to buy sports rights in the U.S.

News Corp. closed News of the World in July and abandoned its 7.8 billion-pound ($12.2 billion) bid for full control of British Sky Broadcasting Group Plc to contain the damage from the hacking scandal. Murdoch’s company almost tripled its stock-buyback program to $5 billion on July 12 after the company lost $6.8 billion in market value in four days. On Aug. 10, News Corp. boosted its quarterly dividend by 27 percent.

The Catalyst

“The scandal was a catalyst for more shareholder-friendly activities and for Chase Carey to become more influential within the company,” Michael Morris, an analyst at Davenport & Co. in Richmond, Virginia, said in a telephone interview yesterday. “Chase Carey is one of the most highly respected leaders in the media industry and has a very strong track record.”

News Corp. would suffer from a faltering economy that causes a slump in the advertising market, according to Laura Martin, an analyst at Needham & Co. in Pasadena, California. Revenue fell four straight quarters though September 2009 versus the year-earlier period as the U.S. financial crisis drove ad sales lower. Diminishing sales helped drive the Class A shares to $4.99, a record low, in March 2009.

“This company has a lot of global exposure to the general economy,” Martin, who rates the shares at “hold,” said in a phone interview yesterday. “Economic weakness in the U.S., U.K. or Australia will have a negative effect on all revenue streams, including subscription purchases, pay-for-play, newspaper subscriptions and advertising.”

Lower Risk

That risk isn’t reflected in the derivatives markets, where News Corp. is perceived as safer than it was earlier in the year. Implied volatility for 30-day options has fallen to 36.80 from this year’s peak of 59.56 on Aug. 8.

Trading of calls surged to this year’s second-highest level on Nov. 21, with almost all call volume concentrated in a single transaction. An investor bought 50,000 January 2013 $20 calls while selling the same number of January 2013 $25 calls, according to Fred Bethon, a managing director for strategy and execution at X-Change Financial Access LLC in New York.

“The hacking scandal could be the best thing that ever happened to News Corp. shareholders,” said David Bank, an analyst with RBC Capital Markets in New York. “This stock, unlike any other stock in its group, has traded to an absolute worst-case-scenario level.”

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