Rupert Murdoch’s AGMs are always good fun but it is shame that no-one else gets up and asks probing questions or that the media doesn’t report what happens in greater detail. But, we’ve got own website so here it is in all its glory.
Rupert was uppity from the start about encouraging questions and seemed pre-occupied – maybe the 7 per cent slide in the stock price on Wall Street overnight was preying on his mind.
After reminding him of his generosity last year he said “don’t push your luck” when I suggested a repeat performance.
There was an abysmal turn up of directors with only Rupert, Lachlan, general counsel Arthur Siskind and chief operating officer Peter Chernin bothering to show.
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However, we did have three directors beaming in over the satellite link up from London. They were Thatcher door-opener Andrew Knight who has made more than $200 million out of his News shares, Rod Eddington who defected to British Airways but has stayed on the News board, and merchant banker Stanley Shuman. The three of them looked like it was 1.30am but at least shareholders were still dished up about half of the board. The no shows of Rupert’s mates – sorry, fellow directors – were Philip Morris chairman Geoffrey Bible, the prospective boss of Sky Global networks Chase Carey, former MCI boss Bert Roberts, Thomas Perkins, finance director David Devoe, the MD of Allen Consulting Stanley Shuman, James Erko and Ken Cowley, who had sneakily double booked himself with former News Corp satellite PMP Communications which held its AGM in Melbourne on the same day.
So the final tally was four directors in the flesh, three from London and a majority, eight, who failed to turn up. Clearly, News should have held its AGM during the Olympics when most of the board were being entertained at shareholders’ expense at the Sebel Townhouse in Kings Cross.
Procedurally back to front as usual
As usual, it was straight into the formal part of the meeting because Rupert doesn’t give his official chairman’s address until after he’s formally closed the meeting. And the chairman’s address contains no slides or presentations – it’s just a few remarks.
So at 10.01am we were straight into the adoption of the accounts and questions were limited to just that.
I had a dip at asking about the book values of various assets. For instance, why is BSkyB in the books at $400 million when it’s currently worth $16 billion. Rupert appeared to dodge the question of why they don’t mark to market each year but did say that One.tel was in the books at cost and there were no more write downs expected on Super League.
Rupert actually missed an opportunity to slap me down at this point because I hadn’t had time to read the annual on arriving at the meeting, instead preferring to hand out the lists of questions to shareholders. Having sold out of News Corp to pay for Crikey, I wasn’t sent an annual report and the News Corp website still had last year’s version on it.
A quick skim later revealed that all those book values I mentioned with the exception of One.tel are disclosed. BskyB is in there at $445 million (down from $743 million in 1999 for some reason), the NRL is in there at $160 million, 25 per cent of Foxtel is valued at $184 million, Fox Studios has been written down from $134 million to $77 million and so on.
The next question focused on the size of Rupert’s current holding and whether he’d be buying more voting stock and selling the non-voting shares. He did admit that any selling last year was based around the need to make further payments to his family. I threw in the question of executive pay at this point as well but he only answered it briefly, saving his major defence for later and suggesting the question wasn’t related to the accounts.
Having not read the accounts, I was in no position to ask any more specifics and with no-one else prepared to have a go we voted on the accounts and they were passed 1.2 billion to 201,000 – fairly convincingly you might say.
With that it was onto the second resolution re-electing the directors and, of course, this was all done in one block. I tried to ask a question about Lachlan Murdoch’s re-election but Rupert appeared not to notice.
I was simply going to ask about the current succession planning within News, especially given the big recent promotion for Lachlan.
The two non-executive directors, Stanley Shuman and Thomas Perkins, attracted the smallest no votes of 457,582 and 435,253 respectively. Lachlan Murdoch’s no vote was 2.6 million and the inhouse counsel Arthur Siskind had 2.6 million also opposing him which suggests that an institution holding two million shares somewhere wanted to make the point that there are too many executives on the board.
Moving right along, we then had the issue of issuing 12,000 preferred share options to a all of the non-executive directors at the knock down price of $10.45 a share. Just so there is no confusion here, the gentlemen concerned are Geoffrey Bible, Rod Eddington, James Erkko, Andrew Knight, Thomas Perkins, Bert Roberts, Stanley Shuman and Ken Cowley.
I ran the argument that it is better for NEDs to get all their compensation in the one period so that if they want to resign on a conscience matter they are not financially handicapped through long term packages. Rupert’s answer was simply that his NEDs are proving great value and not very well paid.
He said he was “not conversant with this debate in Australia” and that on a global basis his NEDs were “compensated in a pretty measly form”.
“We have lively debate about eight times a year. I can assure you that all of you shareholders get wonderful value,” he said.
The voting was clearly sympathetic with my argument and the fact that the directors were significantly feathering their own nest by diluting everyone else.with dirt cheap options. New Corp shares peaked at almost $28 this year, yet these boys are picking up preferred options at $10.55 which are currently about $7 in the money or $84,000 each. The NEDs each got a further 12,000 options at $10.45 last year. This is on top of the average $70,000 a year they take home in cash, which is on the lowside for a company the size of News Corp. Then again, given that you’ve got six executives on the board, only six full board meetings for the year, a two-man nominating committee that met once and a two man audit committee that met twice, this is not exactly what you’d call a normal functioning board. This company is clearly run by the management and by taking up these options, it is now even less likely that a non-executive director will stick his neck on the line out of principle. And despite being asked specifically by Crikey, Rupert did not disclose the terms of the options plan or explain how soon they could be exercised.
Rupert did not vote his 600 million shares on any more of the resolutions at the meeting, so the final vote on the NED options was 498 million in favour and 101 million against – an 80-20 result. This means $2 billion worth of voting shares were opposed to the likes of Perkins and Shuman getting 12,000 discounted options yet less than $10 million dollars worth were opposed to them being re-elected. The message here is: right directors, wrong payment method. Let’s hope Rupert learns from this and doesn’t repeat the dose next year.
Huge options for executives
We then had the question of all those huge options issues to the executive team so I read out an abridged version of the statement from Matthew Horton that was sent around to subscribers before the meeting.
We may as well run it in full here. Matthew Horton’s comments on Options proposal
Matthew Horton is part of the family which ran New Zealand’s largest newspaper group Wilson and Horton for decades until Tony’ O’Reilly’s Irish media group Independent Newspapers progressively took it over for about $1 billion in the mid-1990s.
Matthew was also Business Editor of The Daily Telegraph in Sydney for a couple of years in the early 90s. He owns several thousand News Corp shares and has met Lachlan and Rupert through business when they were interested in his family getting involved with PMP. Thank god they didn’t. Anyway, here goes.
“I don’t really have a statement prepared as I do not possess all the facts. This is perhaps an additional criticism of the notice of meeting: if it was meant to explain the huge differences between the Option strike prices and the current share price, it failed miserably.
Maybe we were meant to supplement our understanding of them by way of media coverage, which is dismal in NZ and insufficient for any shareholder living in a country whose media is not controlled by Rupert Murdoch.
Using the facts as they are stated in the notice of AGM and annual accounts, any ordinary shareholder must surely be outraged at the excessive remuneration the directors are asking us to approve by way of option grants.
They are not justified by the company’s performance in any financial sense. Indeed, the 2000 accounts show the consolidated operating profit before abnormals FELL by $212 million or 15% during the same period for which they are asking shareholders to reward them by way of accepting a significant capital dilution.
It is no lifeline for the company to argue its net profit rose as it did so only by way of a $1.1 billion abnormal profit on the sale of Echostar. Nor can the directors point to this event as part of the company’s intrinsic profitability: it posted a $460 million abnormal loss in 1999 even after the Fox float.
If the lie is ever given to News Corp’s P&L, it is surely through its own cash-flow statements. These show cash generated by operations fell by more than 60% despite operating profit before depreciation, tax and interest remaining more or less constant. So where has the money gone? The two places any middle manager knows where to look: inventories and receivables. Inventories, for example, managed to rise by more than $1 billion during that period. It’s no wonder the company’s dividend policy looks like Oliver Twist’s porridge bowl.
If an examination of the company’s operating profit cannot justify the millions of dollars by which its executives would like the shareholders to diminish their stake in the company, we must presume their salaries are so insufficient so as to demand further reward.
Again, this does not withstand scrutiny. The accounts clearly show the 14 directors paid themselves $6 million more this year than last year. They now receive, on average, $4.3 million each – or $60 million in total. That is equal to the net profitability of many respectable sized companies anywhere in the world. The directors can hardly cry poor. Indeed, Mr Chernin, who now expects us to give him 12 million options that were more than 200% in the money at the time of writing, received more than US$11 million in salary and other benefits last year. If he wants an extra stake in the company to reflect his input, Mr Chernin obviously has more than enough money to buy his own shares without snatching them from the hands of people who have paid for their’s.
Any arguments in support of these option grants must be seen for what they are. They are greedy and intellectually lazy. Money of this magnitude will not keep good executives on board. It has not kept others in the past such as Bill Mechanic from Fox Films, Kelvin Mackenzie from The Sun or Barry Diller. And it will not keep Mr Chernin when it comes time to go.
These option grants are utterly incompatible with a company like News Corp. It does not compare with a wish-upon-a-star internet start-up and it cannot dish out options in the careless manner of one.
They are a disgrace, I do not support them, and they should be withdrawn.”
PS. The only thing I meant to add, which supports my argument, is that the company’s risk profile has increased enormously, as measured by its huge increase in debt over the last five years. The 2000 report (which, ironically for a supposedly New Economy company – has not even been posted on the company’s website yet) shows consolidated debt rose to $15.4 billion last year compared with $8.5 billion in 1996.
Each dollar of debt bought 15c of operating profit in 1996. Last year, it bought just 9c. In other words, the company’s level of risk has increased by 40% over the last five years. The point was well made by analyst Roger Colman (formerly of BT) in the Sydney Morning Herald last week. Roger pointed out not only has the company’s level of return consistently fallen each decade from more than 40% pa in the 1950s to just 5% in the 1990s, the shareholders have been forced to bear ever higher debts to finance Rupert’s asset gambles. They aren’t paying off and the shareholders are now bearing the risk. Only in America, as they say, and probably only at this time in the stockmarket cycle would this sort of performance translate into News Corp’s share performance over the past 12 months. I would have expected the company’s share price to just about halve over the same period.
Given all this, it is hard to see why shareholders should now reward directors and executives beyond their already extremely generous levels. I would have thought they were lucky to get their pay increases.
Chief Executive, Horton Media Ltd
So what’s the question?
I pointed out that the board should be commended for doubling the share price over the past year but then asked why the options were priced so cheaply and why there were no performance hurdles. Similarly, best practice is for executives to sign up for two or three year contracts, yet all of Rupert’s executive time had signed on for 4 or 5 years as part of the deals behind these option grants.
Before getting to Rupert’s answer, let’s lay out the exact details of the options scheme. Chase Carey, Lachlan Murdoch, Arthur Siskind and finance director David DeVoe got 2.24 million options at an average of about $14.80 but this includes one million at just $11 which are already $7 in the money. That’s a $700,000 benefit to each of them that shareholders have just handed over in one vote.
But the big one is president and chief operating office Peter Chernin who picked up one million options at $18.15, 6 million at $11 and a further 6 million at $17.75 for a grand total of 13 million options that will cost him $190 million and are currently worth about $225 million based on Friday’s close of $17.30 for the preferred shares.
Rupert gave his best answer to this question, citing management stability and the higher rates of pay at the likes of Time Warner and Disney. In the case of Peter Chernin, he said he’d be earning a lot more elsewhere. Given that he’s already made more than $100 million out of News over the year he must be bloody good.
As Rupert explained: “We have built an asset currently valued at $75 billion. I think it is more than fair that they also do very well.”
“Mr Chernin could have done better elsewhere, luckily he enjoys what he’s doing.”
“A comparison with the likes of Disney and Time Warner would show they are paid vastly more in the top echelons.”
“All of these people have been with us since some time in the 80s’ giving shareholders a sense of security.”
Rupert then questioned Matthew Horton’s numbers by saying “I don’t think his arithmetic is very good” and corrected me by saying the share price was up 75 per cent for the year and hadn’t doubled.
Any chairman cognisant of meeting procedure would display the proxies received to shareholders. It is actually a legal requirement but Rupert knew the proxies were an embarrassment for him and, frankly, I forgot to ask him to show them.
Massive protest vote ignored by media
It is quite amazing that the media have not yet picked up on the proxies because the options package for executives were almost defeated. In what is the biggest no vote ever recorded in Australia against a company-sponsored resolution, a massive 253.43 million shares were voted against this resolution representing shares worth almost $5 billion. Compare that with the 392 million shares worth about $7.5 billion that supported it. For some reason, Rupert did not vote on this resolution so it only passed 60-40. This is the closest a top Australian company has ever come in Crikey’s memory to being rolled on an options package resolution. The sad thing is that no-one in the media or the investment community has publicly commented on the vote or condemned the pacakges. It seems everyone is just too afraid of arguably the most powerful businessman in the world.
A Big whack of options for Rupert
Rupert then got his own 24 million options waved through which I pointed out were superfluous given that he owns almost $20 billion worth of shares. Afterall, the Packers don’t get options and James doesn’t even draw a salary from PBL. Compare this with Rupert who was paid $12 million last year. Stanley Shuman was called upon in London to support the issue of $528 million worth of options to one bloke. That is certainly the biggest ever issue of options to an executive of an Australian company and probably close to the biggest ever issued anywhere.
The rationale was that Rupert has missed out over the years and this is a catch up allocation. So if he’s catching up, why is he paying double what Peter Chernin is coughing up. Whilst the preferred shares were a couple of dollars in the money when the stock peaked over the past couple of months, they are now almost $5 a share out of the money so no-one really has any grounds to complain. But complain they did as a massive 111 million ordinary shares worth almost $1 billion were voted against the resolution. Again Rupert didn’t vote his own block of shares so the 478 million in favour left him with an 80-20 majority, still not as comfortable as you would expect.
Stanley’s comments in defence of the package were as follows: “It really is long overdue and we feel as a board that we have been remiss in not rewarding Mr Murdoch.”
Stanley also said that auditors Arthur Anderson did a study for them and cleared the package. Which brings us to another point on good corporate governance. Why aren’t the audit fees revealed in the annual report or financial statements like most other companies do? And why aren’t we being told how much AA is being paid for “other services” such as giving Rupert’s options a big tick. Auditors often get compromised by accepting other consultancy work that compromises them. In fact many of them bid low on the audit with this specifically in mind. AA has pocketed more than $50 million out of News Corp over the years and these fees should be disclosed on an annual basis. Of course they’re going to positively critique such a proposal rather than jeopardise their huge ongoing fees.
With this resolution passed, Rupert declared the formal part of the meeting closed and then got onto his speech. It really is like putting the cross-word and racing results on the front page and then burying the front page story on page 44.
Rupert told shareholders the company was in “an extremely good position globally” and that his British newspapers were performing “brilliantly”. He warned of a “weakening” US economy that Fox had recorded “disappointing ratings” last year but he was “very confident Fox is entering the new year in a much stronger position than last year”.
And whilst admitting News was “slow to get into cable” he was now very pleased to have four channels – Fox News, FX, Fox Family and Fox Sports – which had a combined subscriber base of 300 million in the US. He’s particularly pleased with Fox News which he built from nothing to take on Ted Turner’s CNN and now has 65 million homes contracted and will post its maiden profit next quarter.
Moving along to the film division, he admitted the profit slump was “particularly disappointing” and they had “made some mistakes in the films we made” but things were looking up with some new releases.
He then said the book publishing division had an “unambiguously successful” year and after a couple of more remarks tried to close down the meeting.
At this point I leapt up and reminded him that he’d promised more time for questions at the end and he said I could ask one and then come along to the press conference like all the other journalists. As someone whose core business is attending AGMs and asking questions as a shareholder, this was naturally declined. Besides Matthew Horton has almost $200,000 invested in the company and wanted some questions answered.
Unfortunately, there was only an opportunity for two more questions before he shut things down. The first dealt with what is happening with the Sky Global float and whether the ultimate plan was indeed to bid for DirecTV. Rupert had claimed Sky Global was worth $US40 billion a couple of months back but the various component parts which are listed are currently trading at a combined value of about $US25 billion. It seems the timetable has now slipped somewhat with all the market volatility and Rupert decided to send a message to DirecTV with the following line: “We’d be very happy to have DirecTV or Echostar in Sky Global”.
Rupert has already tried the Echostar partnership and is now a sworn enemy of its boss Charlie Ergon (sic) so clearly he’s just talking it up to persuade DirecTV controllers General Motors that the business is worth less $US100 billion. And GM are saying they want one-third of this in cash which would be a stretch for Rupert even after bringing in John Malone’s Liberty Group with an 18 per cent passive stake in News Corp.
There was no such position taking with Vivendi as Rupert referred to its chairman as “my friend Mr Messier”. It sounds like the lads have done a deal over the disposal of Vivendi’s 23 per cent stake in BskyB which the European Commission have told him must be sold if the merger with Seagram/Universal is to proceed. The big question is whether the regulators would allow Vivendi to place it into Sky Global in exchange for scrip.
Free float equals free fall
The last question allowed from Crikey referred to the key but slightly obtuse issue of index weighting. You see News Corp has committed to issue “more than 800 million” preferred shares over the past three months. which has left institutions the world over underweight. When you issue $16 billion worth of stock all of sudden to finance two deals – the Chris Craft television takeover and the Liberty-Gemstar deal with John Malone – your existing shareholders suddenly find themselves with percentage holdings that are about 20 per cent lower. Does that mean they all suddenly have to buy 20 per cent more shares and send the stock higher? It does if Rupert Murdoch’s personal stake and Liberty’s 18 per cent stake in News Corp remains included in the index. However, in February this year the London Stock Exchange adopted the free-float model which excludes all corporate holdings from the index. The best known global index, the MSCI, is now considering a similar move, as is the Australian Stock Exchange. If this happened, institutions would suddenly find themselves overweight in News Corp and would sprint for the exits. It is an absolutely vital issue and Rupert was very testy when I raised it – interrupting with corrections or questions of his own as I went through the issue. He then didn’t answer it in any detail. The tip is that Rupert has privately threatened to relocate News Corp’s registered office offshore if the ASX moves to a free float model. In reality he won’t do this because it would trigger all sorts of tax payments and leave him open to the far more rigorous US accounting rules. Whatever happens it’s an issue to watch closely. At last, other shareholders ask questions
Now it wasn’t exactly a flood of questions but Rupert actually had to deal with three other questions from shareholders at the end. I’d handed out 15 suggested to about half of the shareholders at the meeting in the hope that some would get up and ask them. Rupert had made much of the technologies which facilitate e-publishing and how fast his books could be downloaded so one shareholder asked whether they could develop a technology that would allow the books to be read out whilst driving along. There was a chance for a great line here, but Rupert simply stated that Harper already does release audio tapes.
Exposing Rupert’s dividend selfishness
The next shareholder asked the perennial question about News Corp’s tiny dividend and received applause from several shareholders used to getting $10 dividend cheques. Rupert held out some hope at first by saying “speaking from my heart I certainly hope so”, but then poured cold water on the prospect and reminded the shareholder that “we have built this company by ploughing back the profits”.
This is correct historically but is also a complete fallacy. Back in the days when Rupert was heavily geared and building the likes of Fox Television and BskyB, this argument held water. But now it is complete rubbish and there is no better proof than the fact that Rupert spent $1.5 billion last year buying back its own preferred shares. If it’s got free cash to buy its own shares then it can clearly afford a much more generous dividend policy. The reason it is not forthcoming is Rupert’s personal tax position. If he started paying 25c a year in dividends that would be about $200 million into his private company which is described in the annual report as “Cruden Investments Pty Ltd and associated entities”. That $200 million would attract a high tax rate in Australia because News Corp’s dividends are largely unfranked. Instead, by paying out 3c a year to ordinary shareholder and 7.5c to preferred shareholders. Rupert only receives a cheque for about $35 million which would no doubt be used to neatly offset interest costs on debt held within Cruden.
And by keeping that 25c a share in the company, Rupert lifts the share price by that amount each year. And we all know that his News Corp shareholding predates the capital gains tax regime that was introduced by the Hawke Government in 1985 Therefore, Rupert is currently sitting on a $20 billion capital gain that is almost completely tax free. After issuing all these new shares, the problem is now that Rupert only owns about 18 per cent of all the shares. So why should one minority shareholder dictate the tax policy of all shareholders for his own purposes. Despite what Matthew Horton says about News Corp’s risk profile rising with its debt, it actually has a very lazy balance sheet, especially after the two latest scrip-funded acquisitions. Rupert used to buy things with debt to keep control, now he just issues truckloads of non-voting shares to expand his empire without increasing debt. That’s why his balance sheet now shows consolidated debt sitting at $15.8 billion against total assets of $65 billion and that’s before including these two latest deals which are yet to be closed out.
The last question from the floor came from some wally who stood up and announced to the meeting that I was the same bloke who was standing for the Westfield Holdings board. What that has to do with anything is beyond me.
At this point Rupert held court in front of a press pack numbering about 30. They got a better hearing than last year and Rupert added some value with comments such as his defence of One.tel in which he claimed they were building a great telco but just had some PR problems at the moment. Yeah, PR problems even coming from his own papers who know that it is outrageous for joint CEOs Brad Keeling and Jodie Rich to take home $7.5 million in cash each last year when the company announced a $291 million loss. The problem Rupert has got is that he’s trying to persuade the market that Lachlan is up to the job, yet this stinker of an investment has Lachlan’s paw prints all over it. The same goes for all those millions that Lachlan has blown up through News Interactive. Rupert’s defence was stoic in claiming that News Interactive is better managed than the company’s modest internet invesments elsewhere.
Rupert was also generous to shareholders afterwards by hanging around for almost an hour chatting in the press-free zone he sets up morning tea which this year included champagne.
However, he was in no mood to talk to Crikey. Just goes to show, unless you’re in his pocket, the only way to get a hearing with Rupert is as a shareholder/proxy at his AGM.
See you next year Rupe.