The Australian has led its business section today with talk that Rupert Murdoch is close to doing a $16 billion deal with John Malone’s Liberty Media to remove it as News Corp’s largest shareholder.

Negotiations have been ongoing for almost two years but reports in The Wall Street Journal and The New York Times suggest they are close to a dramatic conclusion that would substantially reduce the size of News Corp, but secure Murdoch family control into the future.

The big question is exactly how many prized News Corp assets Rupert is prepared to surrender to remove Malone. It’s potentially a huge conflict of interest for a board stacked with Rupert’s friends, relatives, political fellow travellers and current and former News Corp executives. Will there be an independent experts report and who is sticking up for minority shareholders? Will they get a vote?

However, News Corp ordinary shares are up 64c to $28.45 this morning so the market doesn’t seem too worried. The last time we saw a controversial deal like this was back in the mid-1990s when Coles Myer paid a premium to buy back Kmart’s 22% stake in the company in a deal that transformed then chairman Solomon Lew into the largest shareholder.

It should be remembered that the Murdoch family only owns about 12.5% of News Corp shares, but thanks to the nonvoting shares gerrymander Rupert controls 29% of the votes and the board.

Removing Malone’s 19% voting stake and 15% nonvoting in exchange for control of DirecTV, 3 US pay-TV stations and $700 million in cash, will increase Rupert’s voting stake to about 36% and his overall interest to about 15%.

Once Malone is disposed of, the big challenge for Rupert will be removing the poison pill and unwinding the gerrymander.

At the moment, News Corp voting shares are frozen out of the S&P 500 because each company is only allowed one security in the index and it must be the most populous.

If News Corp combined the two classes, the overall share price would surge due to a pile of index buying and a takeover premium.

Doing this would show that Rupert believes he can carry the market based on his own record, rather than an undemocratic, value-reducing gerrymander. It will be an interesting test at next year’s AGM when Rupert will also face his first board election in decades.

Peter Fray

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