Crikey subscribers received the news first about John Malone’s stunning $1 billion raid on News Corp last week. This is what they were told in the three editions after the audacious move became public.
From the first November 4 sealed section
If it wasn’t for John Malone, life could hardly be any better for Rupert Murdoch’s News Corporation at the moment.
The move to America was approved by the Federal Court yesterday, George Bush has been re-elected and first quarter profit is up a healthy 18 per cent to $761 million as you can see from this report on The Age website.
But then you had this announcement overnight from John Malone’s Liberty Media, already the largest News Corp shareholder in an economic sense and now lifting its voting stake above the 9 per cent acquired earlier this year. We can’t work out what the specifics mean but it is clear Malone is bearing down on Rupert.
The AFR’s Chanticleer columnist John Durie asked Rupert on this morning’s earnings conference call whether the was upset that Malone had once again done an equity swap to increase his voting stake without providing prior warning.
“We’re quite relaxed,” was all Rupert would say.
Asked about it earlier by an analyst, Rupert said: “As for John buying more shares, I think it just confirms what a good eye for value he has.”
Indeed, and this led to questions as to why News Corp was the only major US media player without a buyback in operation given it will have $US 5 billion in cash at the end of the year. The answers were vague and suggest News Corp might be gearing up for some sort of big play. A takeover bid for Liberty Media anyone?
Rupert did make the aside at last week’s shareholder meetings in Adelaide that John Malone was always ringing up trying to sell him something and that he also hates dividends because Liberty loathes paying tax.
It was a little bit dismissive and maybe today’s vote buying is John Malone’s way of asking for more respect? Check out the January announcement when Malone first picked up his 9 per cent voting stake here.
The Australian’s Jane Schulze asked Rupert if he believed Malone was buying more shares to have greater leverage in floggging some media assets to News Corp. Rupert downplayed the suggestion but it is precisely what happened a few months back in this deal between Liberty and Comcast.
At one level, Rupert should be thanking Malone for putting a rocket under the share price ahead of the November 12 “implementation date” for the move to America which will set the price for any future capital gains tax should the Murdochs ever sell.
In there final day of trading before the Delaware move yesterday, ordinary News Corp shares closed up 54 cents or 4.9 per cent at $11.50, while the preferred were up 14 cents or 1.3 per cent to close at $10.76, so the market was clearly anticipating that Malone was going after more voting stock.
News Corp ordinary shares, trading for the first time on the Australian market as NWS today, reached $23.55. There are now half as many shares on issue after the move to America, so this is the equivalent of $11.77 in the old terms, suggesting the stock is up another 27c or 2.3 per cent in morning trade on the back of the result and Malone’s aggressive buying.
It was an interesting conference call with Rupert this morning as the analysts grilled him for 55 minutes before the press had a brief go over about 10 minutes. It all wound up at 10.10am Sydney time and then the buyers hopped in.
Whilst Rupert was his usual ebullient self, posing a rosy picture of accelerating growth from the world’s strongest media company, the only slight negative was some cautious comments that advertising revenues on the Fox Broadcasting Network were a little weaker than hoped for.
No such problems for Fox News which Rupert gloated pulled in $US5 million in advertising revenue last night – equivalent to the entire amount of advertising sold over its first eight months of operation.
Related party transactions are never far away with News Corp given its convoluted ownership structure and an emerging issue is the proposed increase in retransmission costs that 34 per cent owned DirecTV pays to News Corp for its various Fox channel.
Chief operating officer Peter Chernin was a little terse on this issue: “We expect to be adequately compensated for our retransmission,” he said, before adding that the related parties “have just about closed up a deal”.
Hmmm, sounds like a repeat of Foxtel where News Corp makes fat profits on programming deals such as the 50-50 joint venture with the Packers in Fox Sports. Poor old Telstra shareholders end up wearing disproportionately large losses in Foxtel from this. We wonder who is sticking up for the minority shareholders in DirecTV as their News Corp-dominated board agrees to increased retransmission fees.
Given that the whole basis of the move to America was to get into the S&P500 and attract more US shareholders, it seems strange that there is no timetable laid out.
“We will be quite pleased to receive their phone call,” was all a rather cryptic Rupert would say this morning.
Check out the recent News Corp ASX announcements here.
From the second November sealed section
All those hard won concessions that a global coalition of News Corp institutional shareholders and proxy advisers wrung out of Rupert Murdoch ahead of the move to America now look likely to be voided after John Malone’s Liberty Media put his foot on an 18 per cent voting stake last night.
However, as this confusing announcement suggests, Liberty Media has used Merrill Lynch as a stalking horse before getting approval for its raid from Peter Costello, so it is unclear whether the out-clause of someone else going above 15 per cent of the voting stock is immediately triggered.
TheStreet.com has a brief explanation of the arrangement here.
Check out the detail of the Murdoch concession agreement here. If it is void, Rupert Murdoch would be free to sell his controlling voting interest to Malone and minority shareholders would not be compelled to receive the same offer, as would have occurred under Australian takeover laws.
We know that the Howard Government will do everything possible to help Rupert after his forthright support during the recent election campaign, so don’t expect Peter Costello to raise a scintella of concern about the surging foreign ownership of Australian media. Unless, of course, the Murdochs would like Costello to bloke the Malone raid.
The law states that foreign interests cannot own more than 30 per cent of an Australian metropolitan newspaper, but the News Corp ownership structure was grandfathered at the time, meaning they were able to keep their 39 per cent foreign stake. Back then, this was the Murdoch family stake that was deemed foreign because Rupert became a US citizen in 1985.
However, when John Malone first appeared on the scene with his 9 per cent voting stake, it was speculated that this 39 per cent foreign ownership limit was probably stopping him from buying any more. The Murdoch voting interest was 29.8 per cent so it looked like the combined stakes were at the limit and Murdoch had a takeover defence mechanism. Apparently not now, it seems.
Crikey asked about this at last week’s Adelaide shareholder meeting and News Corp general counsel Arthur Siskind claimed there was “still some headroom” for Liberty to buy more shares but it would need FIRB approval first.
As revealed in Global Proxy Watch, Melbourne-based Proxy Australia predicted the early demise of the Murdoch concessions before the recent shareholder vote on the change of domicile. They were the only players in the corporate governance space to predict this early death of an agreement which was to have run for 10 years if Liberty had stayed below 15 per cent.
The Australian’s Jane Schulze did well yesterday and had a good speculative piece on last night’s Liberty-sponsored Merrill Lynch share raid in today’s paper that you can see here.
News Corp ordinary shares finished their first day as an American company at $23.40 on the Australian market, equivalent to $11.70 in the old terms. This was a rise of 20c for the day, following yesterday’s 54c gain during Liberty Media’s sharemarket raid.
Many Australian institutions took the opportunity to sell to Malone but the shares would have been higher today if not for the warnings of a softening US advertising market during this morning’s first quarter earnings conference call.
From the November 5 sealed section
There was plenty of coverage in today’s papers on John Malone’s sensational $1 billion-plus News Corp sharemarket raid on Wednesday night.
The three best comments pieces were as follows:
Gottie tried this contrarian line, “In a strange way, Malone is in a position to impose a corporate governance safeguard on News that is rare among listed family-run companies. That makes the stock a better longer-term investment than one that was totally dependent on the Murdochs.”
Jane Schulze also did a good job in The Australian where the story was rightly on the front page. The Australian Financial Review was disappointing as Neil Chenoweth is apparently on leave (we’re not sure if this is connected with a bust-up he’s apparently had with his bosses over the Swiss banking Walkley nomination), and the paper merged the profit result and Malone raid stories when they should clearly have been done separately. That said, at least we had a good comment from John Durie in Chanticleer.
Terry “His Master’s Voice” McCann was silent and absent. Maybe he’s taken a couple of days off to weigh up whether he’ll take up the rumoured offer that PBL CEO John Alexander made over lunch at Vlado’s last Friday.
Rupert Murdoch used to ring McCrann regularly but the two have drifted apart over recent years so Terry might have decided he wants to once again work for Australia’s biggest media company – a crown now worn by Kerry Packer’s PBL.
With the Murdoch family concessions now likely to be null and void, Rupert and his very cosy board could be in the position of fully exploiting the dodgy Delaware laws to entrench their position. Malone would be hard-pressed to boot the Murdochs off the board as that requires a majority of all voting capital. Similarly, directors have to serve out their full three years terms.
All this talk about Malone having some sort of increased “control” over News Corp today was complete bunkum, because he does not have a single representative on the board which is stacked full of Murdoch mates, relatives, executives and former executives who have been enriched by Rupert over the years.
The board controls News Corp and Malone will need the New York Fire Brigade to get the Murdochs out of there. However, there is one very interesting tactic which is open to Liberty Media. How about serving up a resolution at next year’s AGM calling for the voting and non-voting shares to be merged into one? Crikey has been thinking about doing this for years.
With Malone’s 17 per cent in the bag, it wouldn’t be hard to get majority approval for a deal that would see the ordinary shares included in the S&P 500 index, just like their more populous non-voting cousins will be some time next year.
Silly Rupert left himself exposed to a Liberty raid by pursuing a deal that sees the ordinary shares kicked out the Australian index but not included in the S&P 500 index. This caused a flood of selling by Australian institutions without any compensating buying by their American counterparts. Malone simply stepped in to fill the gap.
As the non-voting discount narrowed from 15 per cent to about 2 per cent, this quirk of index shuffling also increased the relative value of Malone’s stake which was still concentrated in the non-voting stock. The reverse occurred with the Murdoch family as they had 626 million ordinary shares and only about 210 million non-voting shares.
Crikey told Rupert the whole Delaware proposal was a stupid move that had cost him $1 billion and now it really looks stupid.
But Delaware does throw up some interesting defence options. Could News Corp issue the Murdoch family more voting shares or super-voting shares. That was something specifically banned by the deal with the coalition of institutions.
Both Liz Knight and Crikey got one aspect of the foreign ownership laws yesterday when we suggested newspapers are limited to 15 per cent. That is in fact the rule for television and foreign ownership of newspapers is capped at 25 and 30 per cent.
The following is from the independent experts report put together by Grant Samuel for the News Corp information memorandum on the move to Delaware. It appears that News Corp could potentially refuse to register the Merrills or Malone shareholdings:
The Australian Government has adopted a foreign investment policy relating to metropolitan newspapers, which provides assistance in determining what acquisitions may be regarded as contrary to the national interest. Under that policy, no one foreign investor can acquire more than 25%, and no two or more foreign investors, together (whether they are associates or not) can acquire more than 30%, of the total issued capital of the relevant company as a “non-portfolio” investment (ownership by other foreign investors through “portfolio investments” is not counted towards this limit).
Note, however, that the Government has previously modified this general policy in its application to News Corporation so that the limit is 39% of total issued capital for both any one foreign investor or any two or more foreign investors together (whether they are associates or not).
The Australian Government defines a “portfolio shareholding” as one that does not enable the owner of the shares to exercise control or potential control over the operations of the company. A shareholding of less than 15% will normally, but not necessarily, be regarded as “portfolio”, but a holding of 15% or more of the total issued capital of News Corp US, even if those shares are entirely non-voting shares and are not accompanied by a board position, could constitute a “non-portfolio” shareholding.
The Australian Government has advised News Corporation that, if the Proposed Transaction is implemented, the 39% of total issued capital limit described above will continue to apply in relation to News Corp US. The investment by the Murdoch Family and their associates in News Corporation, which is approximately 14.15% of total issued capital, is “non-portfolio” and counts towards this limit. News Corporation understands that the Australian Government also regards the investment by Liberty Media Corporation in News Corporation, which is understood to be approximately 17.00% of total issued capital, to be “non-portfolio”.
On this basis, the current aggregate “non-portfolio” investment in News Corporation as at the date of this Information Memorandum, as a percentage of total issued capital, is approximately 31.15%.
The Australian Government has stated that any transaction which falls within the scope of the order-making powers of the FATA should be notified to the Treasury, unless the transaction is a “portfolio” investment, and is of less than 5% of the issued shares of News Corp US.
There are also certain compulsory notification requirements under FATA where a person acquires a substantial interest in an Australian company, which may through the tracing provisions in the Act be triggered upon an acquisition of 15% or more of News Corp US.
As discussed above, failure to comply with the Australian legislation or policy may entitle the Australian Treasurer to make a number of orders, including divestment of shares or to seek additional orders from an Australian court. An Australian court is specifically empowered under the legislation to make an order requiring News Corp US to divest itself of its Australian businesses if such an order is considered the most appropriate means of protecting Australia’s national interest from excessive foreign control of Australian usinesses.
To assist News Corp US in managing the risk of such an order, News Corp US’s certificate of incorporation gives the Board of News Corp US power to refuse to permit or honour transfers of shares, or to redeem shares, where to do otherwise could result in any regulatory violation or certain other adverse consequences to News Corp US.
CRIKEY: Peter Costello could yet be a major player in this saga.
News Corp’s new CHESS depository interests (now listed on the ASX under NWS) are up 36 cents to $23.67 in today’s trading, while the non-voting scrip (NWSLV) is up 51 cents to $22.94.