Losing a newspaper and losing an empire?

The Murdoch dynasty is in trouble because the toxic stuff in Wapping has reached Wall Street

ONE IS too old, the other too young. This was one reading of the extraordinary appearance of Rupert Murdoch and his son James before the British parliament select committee this week.

In response to MPs questions, 80-year-old Murdoch snr’s well-drilled contrition was barely audible, sometimes cupping his ear like a kindly uncle listening to the telly. Next to him, his son spoke clearly and eloquently, but afterwards few could remember anything he said.

The News Corp share price rallied as the session wore on, the markets seemingly relieved that the father and son team were evading the one final killer question.

Longer term however, this week will be pivotal in answering some fundamental questions as to the future shape of the company: What is News Corp and who will run it?

Since the phone hacking scandal first to came to light, News Corp has lost more than $6 billion (€4.2 billion) in value, a 15 per cent drop. One billion dollars have come off the share value since it was first alleged that News of the World journalists hacked the voicemail of murdered teenager Milly Dowler.

Standard and Poor’s added further pressure this week by adding its stock to its credit watch list after what it sees as “increased business and reputation risks”. One key fear among investors surrounds the FBI’s investigation into allegations that voicemails of 9/11 terrorist attack victims were hacked.

Faced with this threat of contagion, the previously unthinkable suddenly became the most obvious thing to do. Murdoch closed down The News of the Worldand time will tell whether he and the company will sell his other British newspapers – The Sun, The Timesand The Sunday Times– and exit Fleet Street forever.

Rupert Murdoch used his own Wall Street Journalto counter this speculation, but the story won't go away. Like all good rumours it has a clear understandable logic at its heart. Murdoch loves newspapers, which have brought him such power and influence over the political classes. But he is the ultimate pragmatist and he won't risk blurring the big picture, runs the logic, by clinging to the past. This is a chance for News Corp to tell the markets once and for all what should be the future – digital, TV and media – not the romantic but low growth inky press. As Rupert Murdoch told MPs this week, the News of the Worldrepresented just 1 per cent of the company's revenues, despite its 2.7 million distribution outselling every other paper in Britain.

This point was reinforced when News Corp’s quarterly financial figures were released in May. Chase Carey, the chief operating officer, and now potential chief executive, railed against the analysts who persisted in viewing News Corp as a newspaper company.

Look at the numbers he said. Net profit for the whole group was reported to be $682 million for the first three months of 2011. News Corp’s cable division, which includes Fox News, generates almost 60 per cent of operating profit. This division increased operating income by 22 per cent to $735 million. This was caused by rising fees from American cable and satellite carriers and a 37 per cent advance in its international channels, in particular India and Latin America. The US broadcast business, where operating income jumped from $29 million to $151 million, was on track to generate at least $1 billion in annual operating income “within a couple of years”, said Carey.

To this core can be added the company’s film assets. The enormous commercial success of Avatar, the James Cameron 3D “Smurfs in the forest” extravaganza skewed this year’s profit figures, reducing the film unit’s operating income from the Avatar inspired high of $324 million to $189 million year-on-year.

Set against this good news was the disposal of social networking site MySpace, bought at the site’s zeitgeist in 2005, and sold recently for $35 million, a $545 million write down.

However, despite this loss, it is two other deals, for Shine and BSkyB, which have most exercised shareholders. In February, News Corp paid $615 million for the Shine Group, a media company owned by Rupert’s daughter Elizabeth Murdoch, whose personal windfall from the sale was $250 million.

Two separate groups of shareholders – Amalgamated Bank and the Central Laborers’ Pension Fund – are suing the company, accusing the board of providing “no effective review or oversight” and alleging that: “Rupert Murdoch did not even pretend that there was a valid strategic purpose for the Shine deal, as he proudly boasted that its goal was to bring his daughter back into the News Corp fold.”

To which one answer would be, what did you expect from a family business? The Shine lawsuit reveals the limited options available to shareholders of the company. The Murdoch family own just 12 per cent of the total shares in News Corp, according to Bloomberg, (although the “unknown” status of about 40 per cent of the shareholding could be made up of Murdoch loyalists).

But because of the nature of the shareholding structure, the family have almost complete control. About 70 per cent of shares in the company are classified as “A shares”, which carry no voting rights. The family stock consists of 40 per cent of the vote carrying “B shares”, making shareholder revolt extremely difficult. “There is no scenario where have had a say in corporate governance at News Corp,” media analyst Claire Enders told the BBC. “The Murdochs make all the decisions.”

One such decision is the proposed takeover of BSkyB, the dominant British satellite-television company, in which it owns a 39 per cent stake, and which until recently was being lauded as Rupert’s last great deal. Now, it is mired in a political and financial bunfight, which may be the catalyst of his demise.

He is not the only one who has been bruised by the affair. The speculation of a News Corp takeover of BskyB initially boosted the remaining stock at the satellite broadcaster. The shares are held predominantly by large institutional investors such as Norwegian fund manager Norges Bank; Halcyon Asset Management which manages £11.5 billion in shares, Perry Capital, an American hedge fund and Davidson Kempner, another US finance group.

However, the British government referred the takeover to the Monopolies and Mergers Commission amid public and political outrage over phone hacking, leading the Murdochs to announce they were pulling the deal. One significant BskyB shareholder, Taconic Capital Advisers, shocked the markets by dumping 10 million shares last Friday at a knockdown price of 753p. The shares had formerly been traded at about 840p.

Such a move will prompt other large shareholders – of both News Corp and BskyB – to consider their positions; and that of the man who has spent his life building the company.

This week’s events show that newspapers may lack the financial clout of other, shinier investments, but still pack a punch. They spread the news, good and bad, and the danger for the Murdoch dynasty is that the toxic stuff coming out of Wapping these last few months has now reached Wall Street. Losing a newspaper is one thing. Losing an empire, quite another.

SELECTED NEWS CORPORATION ASSETS AROUND THE WORLD

US

Newspapers and information services

The Wall Street Journal

New York Post

Dow Jones Newswires

Factiva

Barron’s

MarketWatch

Film studios

Twentieth Century Fox

Fox Searchlight Pictures

Fox Music

Cable TV stations

Fox News

Fox Business

National Geographic Channel (71%)

TV stations

Fox Broadcasting Company

MyNetworkTV

Fox stations in 27 major markets

Books:

HarperCollins Publishers

Europe

Newspapers:

The Times

The Sunday Times

The Sun

The Wall Street Journal Europe

Satellite broadcasters:

Sky Italia

British Sky Broadcasting (39%)

Satellite channels:

Fox Europe

Fox Sports Europe

National Geographic Channel Europe (52%)

Asia

Newspapers:

The Wall Street Journal Asia

Books:

HarperCollins India (40%)

Satellite broadcasters:

Tata Sky (20%)

Cable TV stations:

Hathway Cable and Datacom (Star Television) - (17%)

Vijay (81%)

Asianet (75%)

Star News (26%)

ESPN Star Sports (50%)

Phoenix Satellite Television (18%)

Australia and New Zealand

Newspapers:

Almost 150 national, metropolitan, suburban, regional and Sunday titles, including:

The Australian

The Daily Telegraph

Herald Sun

The Courier-Mail

The Advertiser

Cable TV stations:

Premier Media Group (50%)

Satellite broadcasters:

Foxtel (25%)

Sky Network Television Limited (44%)

Sport:

National Rugby League (50%)