News Corp. at 50% Discount Shows Diminishing Murdoch: Real M&A
The company, which owns the Fox TV networks and the Wall Street Journal, fell 13 percent through last week after allegations surfaced that one of Murdoch’s tabloid newspapers hacked into the voicemail of a murdered schoolgirl, wiping out $6 billion from News Corp.’s market capitalization in less than two weeks. The $41 billion company now sells for less versus earnings than any of its closest rivals, according to data compiled by Bloomberg.
By valuing each of News Corp.’s businesses separately, the New York-based media conglomerate would be worth $62 billion to $79 billion, estimates from Barclays Plc and Gabelli & Co. show, indicating News Corp. trades at an almost 50 percent discount to its units. Murdoch, 80, is facing increasing scrutiny over his management of News Corp. after the phone-hacking revelations forced him to abandon a takeover of British Sky Broadcasting Group Plc (BSY) and deepened a slump that’s left shareholders with a 16 percent loss in the past five years even as rivals gained.
“There’s just sort of this generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests,” said Michael Morris, an analyst at Davenport & Co. in Richmond, Virginia. “The sum of the parts on News Corp. is huge compared with where the stock trades.”
Based on Morris’s own sum-of-the-parts analysis, News Corp. is worth about $25 a share, 60 percent higher than the company’s closing price of $15.64 last week.
Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
Shares of News Corp. slid 4.3 percent to $14.97 today in New York. Shortly before the close of trading, Standard & Poor’s put the company’s BBB+ corporate debt rating on CreditWatch with negative implications, citing the potential damage to News Corp.’s business and reputation from probes into phone hacking.
Murdoch and his son James were summoned last week to appear before U.K. lawmakers to answer questions about employees paying police for stories and the FBI began examining whether News Corp. employees tried to hack into phones of Sept. 11 victims.
Les Hinton, chairman of News International, the U.K. publishing unit that included News of the World when the alleged hacking occurred, stepped down as head of the Dow Jones division on July 15. That came hours after the exit of News International Chief Executive Officer Rebekah Brooks, who was then arrested by U.K. police yesterday.
Brooks was editor of News of the World, which closed this month as a result of the scandal, from 2000 to 2003.
The spotlight will shift back to Murdoch and his son James tomorrow as they testify before the U.K. Parliament.
Ed Miliband, leader of the U.K.’s opposition Labour Party, called yesterday for Murdoch’s media company to be broken up. Miliband told the Observer newspaper that the breadth of Murdoch’s ownership is “unhealthy because that amount of power in one person’s hands has clearly led to abuses of power within his organization.”
Independent directors of News Corp. have begun questioning the company’s response to the crisis and whether a leadership change is needed, said two people with direct knowledge of the situation who wouldn’t speak publicly.
Some people close to the Murdoch family and News Corp.’s directors said last week they thought it would make sense for Murdoch to relinquish his job as chief executive officer and stay on as chairman.
“Rupert should go because it’s in the best interest of everybody,” said Terry Smith, chief executive officer of London-based inter-dealer broker Tullett Prebon Plc. (TLPR) “The phone-hacking scandal is symptomatic of his business judgment.”
“When a large number of your staff have been involved in criminal activities, normal CEOs of public companies who have to answer to outside shareholders and capital providers are less inclined to sweep it under the carpet,” he said.
If the position of the Murdoch family weakens further, Chief Operating Officer Chase Carey may be named as interim CEO, one person close to the family and board of directors said last week. In a statement last week announcing Hinton’s departure, Murdoch downplayed his own importance to the company he built from two inherited Australian newspapers.
“News Corp. is not Rupert Murdoch,” he said. “It is the collective creativity and effort of many thousands of people around the world.”
Yacktman Asset Management Co.’s Don Yacktman, whose biggest holding is News Corp., said that while Murdoch is in charge the company may remain undervalued versus its rivals.
“Mr. Murdoch is going to do what Mr. Murdoch chooses to do, unless he is forced to do something else,” said Yacktman, whose $5.4 billion Yacktman Fund (YACKX) has beaten 99 percent of like funds in the past five years. “If he stepped down, yeah, probably the stock price would go up, because there’s a Murdoch discount.”
“There are other people on the management team than Murdoch,” Yacktman said, citing Chase Carey. Still, “You have to have some admiration for Murdoch, even those who despise him, for his financial acumen because he’s been successful. Murdoch has shown kingdom building skills.”
The crisis at News of the World has for now thwarted News Corp.’s strategy to leverage pay-television provider BSkyB into new digital businesses.
Full ownership of Isleworth, England-based BSkyB, which has 10 million subscribers, would have facilitated the bundling of print and pay-TV subscriptions by spreading content over different media platforms, making News Corp. less susceptible to advertising sales at its newspapers.
Murdoch’s attachment to newspapers, which has contributed to a 28 percent decline in operating income at News Corp.’s newspapers and information services unit in the past five years, has cost News Corp.’s shareholders billions of dollars.
The company’s market value has shrunk by $31 billion since it offered to pay a 70 percent premium for New York-based Dow Jones & Co., publisher of the Wall Street Journal, in May 2007.
News Corp. wrote down the value of the $5.1 billion deal by $2.8 billion in the second quarter of fiscal 2009, according to a filing with the Securities and Exchange Commission.
Since completing the deal in December 2007, News Corp. has lost 21 percent, including dividends, while media companies in the Standard & Poor’s 500 Index gained 20 percent. New York- based Time Warner Inc. (TWX), owner of HBO and TNT, returned 12 percent in that span, and Walt Disney Co. (DIS), the Burbank, California-based owner of the ABC network, rose 24 percent.
News Corp. also exited its 41 percent stake in Gemstar-TV Guide International Inc. in December 2007 after $6 billion in writedowns, and agreed last month to unload MySpace for $35 million, a fraction of the $580 million it spent six years ago.
Murdoch’s purchase of his daughter’s TV production company, Shine Group Ltd., caused shareholder Amalgamated Bank of New York to sue News Corp.’s directors in March and accuse Murdoch of nepotism.
News Corp. now trades at 12.7 times its reported profit, versus an average of 16.5 times for media companies in the S&P 500. Time Warner has a multiple of 14.7, while Disney trades at 17.1 times profit, data compiled by Bloomberg show.
‘Just Don’t See’
“You’ve got a lot of headlines about News Corp. that you just don’t see about other media companies,” said Barton Crockett, a analyst at Lazard Capital Markets in New York. “You’ve got phone hacks, purchases of companies run by relatives and big acquisitions of newspaper companies. Investors don’t necessarily like Murdoch spending on these things.”
The missteps have left News Corp. trading at a discount to the value of its parts, even without its newspaper business.
By applying market multiples to each of News Corp.’s units, Brett Harriss, analyst at Gabelli in Rye, New York, says the company may be worth a total of $79 billion.
News Corp.’s cable business, which Harriss estimates commands a valuation of 9 times its estimated earnings of $3.93 billion before interest, taxes, depreciation and amortization next fiscal year, would be worth $35 billion including net debt.
The company’s film, TV and satellite units together would sell for almost $20 billion, and News Corp. also has about $13 billion in investments, based on his projections.
Adjusting for News Corp.’s estimated net cash next fiscal year, the company’s equity value without the newspaper unit would still exceed $70 billion, the data show.
On a per-share basis, Harriss estimates that all the media conglomerate’s pieces would add up to almost $29.87, an increase of more than 90 percent from its current share price.
Barclays projects that the value of News Corp.’s businesses may equal about $25.77, excluding its so-called conglomerate discount and after accounting for share buybacks. Last week, the company almost tripled its repurchase program to $5 billion.
While News Corp. languishes at a discount to the sum of its parts, Stewart Capital’s Malcolm Polley says Murdoch is unlikely to consider a sale or break up after spending decades to build up his global media empire.
Even if Murdoch were to step down as CEO, he and his family would still control management decisions at News Corp. through its 38 percent stake in the Class B voting shares, Polley said.
‘Might Make Sense’
“You’ve got a company where a very large shareholder controls what’s going on,” said Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “There are things that might make sense to do that in a normal situation shareholders might agitate to get done, such as having him step down or selling off businesses, but you really can’t here.”
Still, Tullett Prebon’s Smith says the phone-hacking allegations and the resignations of two of the company’s senior executives will embolden more shareholders to question Murdoch and his role at News Corp.
“We’ll see more pressure on Murdoch now,” Smith said. “One of the things that’s kept people away is that he has a powerful media presence, and people are fearful of crossing swords with him. Much of that fear is gone now.”
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