Merrill Lynch, the worlds biggest stocklbroking house, have really been pumping up the News Corp share price in recent months. Their latest research by much-hyped New York-based media analyst Jessica Reif-Cohen is a pearler. It has literally added billions to the Murdoch’s family’s paper fortune.
By An Agitated non-Merrill Lynch media analyst and Stephen Mayne

Merrill Lynch, the world’s biggest stockbroking house, have really been pumping up the News Corp share price in recent months. Their latest research by much-hyped New York-based media analyst Jessica-Reif Cohen is a pearler. It has literally added billions to the Murdoch family’s paper fortune.

The stock jumped 10 per cent on release of the report and these are the key points Jessica made:

* Second quarter earnings per share forecasts were lowered from US31c an ADR (equivalent of four ordinary News Corp shares) to US24c, a drop of 22.5 per cent!

* However, Merrills did not lower full year forecasts even though the second quarter is seasonally the strongest for the year.

* Merrills expect a second quarter EBIT (earnings before interest and tax) of $US513m versus last years proforma EBIT of $US509 (after TV Guide sale).

* Merrills raised the News Corp target share price to $25 this year (up about 20%) and $30 for next year.

* Merrills raised Star TV (Asian satellite TV business) valuation to $US5 billion from their previously “absurdly low $US1.5billion”. No explanation was offered for this tripling but in one fell swoop it added $US3.50 or 70 per cent of their upgraded target price.

* Merrill have also valued the internet health business Healtheon at $US600 million even though News Corp has only paid $US200 million with a cash balance of $US700 million to be paid over the next 10 years in free ads. Talk about value creation.

Merrills are projecting Fox Entertainment, the listed American television and film offshoot which represents about half of News Corp’s total value, will suffer a five per cent drop in EBITDA (earnings before interest, tax, depreciation and amortisation) and a massive 53 per cent slump in earnings per share!!! Despite this they have slightly raised their 2001 price target for Fox Entertainment to $US36 per share.

There is no doubt the Merrill report is a powerful marketing document. Consider these overhyped gems from Rupert’s favourite Wall Street analyst:

“We have never witnessed a company that trades at a negative multiple”

Rupert Murdoch is a “standout visionary” and “has shown remarkable discipline” in not buying EMI or Chris Craft!

News Corp has “only begun the process of unleashing remarkable hidden value” – all this after the stock has risen 85% in the last 3 months.

“Investors are actually being paid to buy the stock!!!” – their exclamation marks.

As a media media analyst in the new economy perhaps I’m too old fashioned to be concerned about News Corp’s earnings always falling. But I do worry about the EPS trend falling away.

Perhaps all this spruiking just means another News Corp deal is very close. News Corp executives have also been outrageously talking up the stock, yet the ASX never seems to query them about the share price. Is Rupert just too big a fish.

Should News Corp’s finance director David Devoe really be saying things like this when the company announced a big profit drop last week: “For a long time our stock had been undervalued and it remains undervalued.”

Of course you’d say that about a company that has enjoyed a 40-fold increase in its share price over 10 years, is on a pitiful dividend yield of 0.2 per cent and had just announced a 26 per cent slump in interim profit to $645 million.

And if that wasn’t enough, how about chief operating officer Peter Chernin, the man who was paid $18 million last year. Pete fanned the speculation of a deal with this line: “We are furiously reviewing old business plans against the new reality of broadband, e-commerce, and the Internet and we’re asking how we can derive more value from out assets using these new technologies.”

It looks pretty obvious that Rupert is about to issue a bucket load of stock as part of a big merger or takeover and he wants to get his price as high as possible to minimise the dilution of his control.

If there is a deal and Merrill Lynch is in it, then some serious questions need asking. Where is their Chinese Wall? Where is a good regulator when you need him?

Afterall, Rupert has not been the most angelic operator in the US market. Two of his big deals over the past five years were put together by disgraced junk bond dealer Michael Milkin. The US Securities and Exchange Commission fined Milkin for breaching his securities trading ban and confiscated the $40 million in fees he collected from News Corp for his work.

Wouldn’t it be ironic if Rupert, Merrill Lynch and Michael Milkin were packing a mega-deal together.

Disclosure: Stephen Mayne sold his last 200 News Corp shares at $21.80 each last week. This reflects his view that the stock is overvalued and the capital hungry nature of this Crikey beast.

Peter Fray

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