As Rupert Murdoch contemplates a peace deal with John Malone’s Liberty Media it is worth considering the nature of his outrageous of his gerrymander and the implications of a selective buyback.
Rupert’s outrageous selective buyback
From our first 7 February subscriber email:
We’re all still waiting for the wonderful re-rating that was meant to flow from News Corp’s move to America.
Instead, all we’ve got so far is dodgy corporate governance, a disgraceful poison pill to ward off predators, an outrageous new contract for Peter Chernin, profit downgrades and now talk of a selective buyback to take John Malone’s Liberty Media out of the picture.
The mainstream media did not really make a big deal about Rupert’s comments at Thursday’s earnings conference call about what was in prospect with John Malone. The key quote was as follows:
“We may be able to take back and cancel some of [Liberty’s News Corp] shares in return for some cash and maybe some asset which they would value more than we would value. But we are certainly not going to be giving up big assets which we have really big plans for. Nor are we going to have our cupboards cleaned out of all our cash. There is plenty of room to talk.”
Since when does an executive chairman openly canvass a selective buyback that will entrench his own power? If ever you needed a demonstration of why News Corp needs an independent chairman and genuinely independent board then this is it.
Selective buybacks are always hazardous because it doesn’t treat all shareholders equally. It sounds like Rupert is going to use company funds and assets to buy the peace with John Malone.
The Murdochs will benefit by reaffirming their control, Malone will benefit from a sweetheart deal and the rest of the shareholders will pay over the odds and probably get diluted for the privilege.
One of the last controversial selective buybacks we saw in Australia was when then Coles Myer chairman Solomon Lew drove the retailing giant to spend $1.3 billion taking out Kmart’s 20 per cent stake at a premium to market.
This, of course, suddenly made Solly the largest shareholders with a foot on 13 per cent but his influence has long gone now, thankfully.
If Rupert attempts a really silly deal with Malone, don’t be surprised if it triggers a move by institutions to challenge the 50-year plus Murdoch dictatorship at News Corp. Institutions absolutely hate special interest selective buybacks and they passionately believe in one vote one value and everyone being treated equally.
From the first February 9 subscriber email
By out-of-retirement shareholder activist Stephen Mayne
Crikey is still waiting for some outrage to emerge in the non-Murdoch media and investment community about Rupert Murdoch’s proposal to do a sweetheart selective buyback deal with John Malone to take him out of the News Corp picture.
The numbers of the Murdoch gerrymander become more outrageous with every deal but buying back and cancelling Liberty Media’s 18 per cent voting stake in News Corp would be a breathtaking move, even by Rupert’s standards.
At the moment, News Corp has 1.89 billion non-voting shares on issue and only 1.05 billion voting shares. Rupert owns 10 per cent of the economic interest but has 30 per cent of the votes because he owns 370 million voting shares compared with only 62 million non-voting shares.
But how will this change after the two latest deals – the $7.7 billion offer to take out the minorities in Fox Broadcasting and talks to take out John Malone’s 18 per cent voting stake in News Corp with a selective buyback.
Well, if successful, the offer would see a further 332 million non-voting shares issued, lifting the total to 2.22 billion, or 67.8 per cent of the total.
Then you have the effect of any Malone selective buyback. If Rupert wants to seriously take him out of the game he would need to spend more than $4 billion of company funds buying his 180 million voting shares.
That would reduce the total number of voting shares on issue to about 870 million and lift Rupert’s stake from 30 per cent to 35.4 per cent – giving him unbreakable control into the future.
So Rupert would expand the empire by securing 100 per cent of Fox and simultaneously further gear the company by running down its cash pile to take out Malone’s voting stake – all in the name of warding off someone who might want a say in who runs the company after Rupert moves on.
The gerrymander would be even more pronounced with the non-voting stock comprising just 870 million out of 3.1 billion – or just 28.9 per cent of the total.
At some stage the question has to be asked as to how small a minority of the total stock on issue the voting shares should become.
Why don’t we just give Rupert the single voting share and let everyone remain second class citizens with the powerless non-voting paper that Rupert continues to issue like confetti.
From the second 9 February subscriber email:
Mr JB Goldman Were writes:
The Wall Street Journal is carrying an article suggesting that the Bush Administration’s proposed 2006 budget would restrict the use of “cash-rich spin-offs”, something that might hit any proposed peace deal between Rupert Murdoch’s News Corp and John Malone’s Liberty Media.
Under the current structure, cash can represent 90% of the spin-off company’s value with a small operating asset making up the balance. This ‘company’ is then spun-out and swapped for shares. This method ensures no capital gains are incurred on the sale of the shares, and Rupert commented at his final Australian AGM that Liberty Media absolutely hates paying any tax.
Under the new proposal, cash can only make up 50% of the spin-off company’s value and hence a more significant operating asset is required. Rupert Murdoch indicated in last week’s earnings conference call that he was not keen to swap “big assets” which they have “big plans” for.
The ‘loophole’ that allows these tax effective deals to exist was always at risk of being removed in the medium term. This does not mean News Corp and Liberty can not negotiate a deal, they just need to do so before the new legislation is introduced on October 1. Goldman Sachs sees a favourable deal with Liberty as a major catalyst for the stock. It is worth noting however that the Dirty Digger has indicated that any deal with Malone is 6-9 months away.