News Corp’s relentless attacks on former CEO Kim Williams belie a fundamental truth: Williams’ management of Foxtel was a financial boon for the company.
News Corp’s reaction to Crikey’s exclusive revelations about the dire state of its Australian newspaper empire in 2012-13 was two-pronged: one, to say that the accounts were old and everything was fine now; and two, to blame the poor performance on former CEO Kim Williams. What News’ attack dog The Australian has yet to do, however, is to give Williams his rightful due for what he did for the Murdoch mob at Foxtel, turning it into a cash cow that was regularly milked by News and Telstra to the tune of $1 billion (or more) in the past five years. That was enough to get him promoted to run News Corp Australia, where his attempts to reshape the company and give it more time to adapt to the digital onslaught from the net were frustrated by the dinosaurs who remain in control to this day.
Williams has been the subject of some virulent comments from News commentators in the past week or so, and more will no doubt flow this week when he launches his new book, Rules of Engagement. But they are biting the hand that helped feed and sustain the Murdoch empire in Australia. The annual distributions from Foxtel have been greater than the “earnings” from the collection of dying newspapers being run into the ground by the dinosaurs at Holt Street in Sydney and elsewhere — Melbourne, Brisbane, Adelaide, Perth and beyond. In fact, in 2013-14, Foxtel paid News $219 million in shareholder distributions and interest on a shareholder loan, which is more than the News Corp papers earned. And including 2012-13, the total distribution is more than $400 million (with a similar amount flowing to Telstra). Adding in smaller distributions made in earlier years by Foxtel, the amount received by News would be over half a billion dollars. Prior to 2012, the distributions were split three ways between News, Telstra and Cons Media.
Thanks to the 10 years spent saving and then rebuilding Foxtel for its owners — including News Corp, Telstra and the Packer family (until 2012) — Kim Williams is the man who has helped give the Murdoch clan’s analog Australian media assets a few more years of life. But don’t tell that to Holt Street.
Buried in the 2012-13 and 2013-14 annual reports of News Corp are the brief accounts for Foxtel, included after News bought 25% of the pay TV giant owned by James Packer’s Cons Media Holdings. They are included because News Corp, through News Corp Australia, is the manager of the pay TV company because of its ability to appoint the CEO (Telstra can appoint the chair). These accounts show that Foxtel is a money machine — the most profitable business in Australia’s dying media sector. The legendary “rivers of gold” that were the Fairfax family’s classified ads in The Sydney Morning Herald and The Age (and now in the News Corp Australian papers) dull beside the glittering finances of Foxtel.
“Without Williams’ management abilities, lobbying efforts and the team of executives he assembled at Foxtel, News Corp’s already strained finances would have been more stretched…”
That is especially so since the Austar takeover in 2012 for $2 billion. It was financed by bank debt and shareholder loans from News, Foxtel and Cons Media (News took over that loan) that totalled more than $900 million. The debt will remain on the Foxtel balance sheet for up to 13 more years under some circumstances. In effect, the partners lent Foxtel money to help complete the Austar buy and are keeping the loan, even though Foxtel could have raised enough from its banks to pay it out when it renegotiated bank debt in 2013-14. Foxtel pays interest only on the loans to News and Telstra of 12% a year, which is very high given that the owners of Foxtel, News and Telstra, are effectively repaying themselves. (High interest rates supposedly represent high risks — there’s the old adage of finance: the higher the risk, the higher the reward. But can anyone imagine Foxtel, Telstra or News going broke? Because that’s what the 12% interest rate is telling us; that the loan is a high-risk transaction, when it really is one of the safest there is.) In effect the shareholder loan is another way for Telstra and News to direct funds to themselves from the great Foxtel cash machine. That’s in addition to the annual distributions.
The 2013-14 accounts show that for the year ended June 30, the Foxtel Group had revenues of US$3.2 billion, net income before income taxes of US$360.5 million, net interest expense of US$221.9 million, depreciation and amortisation of US$380.5 million, foreign exchange and other (losses), gains on hedges, net of US$26.3 million, and equity earnings of affiliates of US$6.4 million. Net cash provided by operating activities for the year ended June 30, 2014, was US$697.7 million.
The Foxtel Group made cash distributions to partners of US$330 million in aggregate and paid interest of US$108.3 million in aggregate on shareholder loans in 2013-14. That’s a total of US$438 million. In 2012-13, the Foxtel Group made cash distributions to partners of US$310 million in aggregate and paid interest of US$90 million in aggregate on shareholder loans, or a total of US$400 million, or just under US$850 million in two years. For huge Telstra, with its billions of dollars in earnings over the past two years, the US$424 million paid by Foxtel was of minor consequence, but for News Corp Australia, it was gold.
And the accounts show that “approved returns” of US$857.0 million in aggregate have been made to partners over the past three years. This doesn’t include the interest payments in 2012-13 and 2013-14. Add the US$198 million made over that time and you get a total of US$955 million. And there are much smaller distributions (of US$50 to US$100 million for several years before the Austar and then Cons Media takeovers).
Kim Williams and his management team at Foxtel helped create the climate for Foxtel to flourish. Yes, it is a monopoly, and Williams wasn’t backwards in using that strength and the Murdoch name. But running a monopoly isn’t a guarantee to outperformance, or even good performance — just look at the Sydney trains and buses and their billion-dollar plus losses a year. But it is clear that without Williams’ management abilities, lobbying efforts and the team of executives he assembled at Foxtel, News Corp’s already strained finances would have been more stretched without his dowry — the more than half a billion dollars Foxtel has paid News over the past three years and longer.