Don’t believe what you read, Lachlan Murdoch needed his father’s approval to do the deal with James Packer to try and take joint control of the Consolidated Media Holdings and its group of mostly Pay TV assets.

Lachlan Murdoch protested far too much last night when he said there was no involvement from News Corp or his father. The reality is that Rupert Murdoch and News hold the whip hand over the deal through pre-emptive rights over the key shareholdings in Foxtel and Premier Media Group/Fox Sports.

You have to remember that as part of the settlement of the Super League wars a decade ago, News sold PBL half of Fox Sports (now renamed Premier Media Group) and 25% of Foxtel (or half News’s then 50% stake in Foxtel). News controlled these holdings through the tough rights of approval.

The statement yesterday by Cons Media and from Murdoch Junior and James Packer failed to mention that News Ltd holds these pre-emptive rights over the 25% of Foxtel and 50% of Premier Media Group (Fox Sports) owned by Cons Media (CMH). These rights are spelled out in the de-merger document issued late last year by PBL which saw the gaming assets spun off into Crown and the media holdings into CMH.

Page 138 of this document details the rights News Ltd and PBL have in respect of their shareholdings in Foxtel and Premier Media/Fox Sports and their rights to appoint the two senior executives of both groups. The rights make clear that the approval of News Ltd, and therefore News Corp and Rupert Murdoch, are vital for this deal to happen.

There is a legal opinion that the approvals of News or CMH are not needed if a change of control was to occur at a holding company level, but as one lawyer with knowledge of the arrangement said recently to me: “Yes, in theory that could happen, but you wouldn’t like to try.”

And there’s one further point: If Lachie and James botch this one in a repeat of OneTel (CMH has no cashflow or profit generating business, so will they buy Austar?) News Ltd will be able to buy the stakes in Foxtel, PMG by exercising the pre-emptive rights.

That’s the final example that this is a deal blessed and approved by Dad.

Would Lachie have been lent the money if he was Lachlan Jones and dad a plumber out at Greystanes in Sydney? Of course not. He’s got the money because of his family name, his father and the fact that he, along with his father and siblings and relations are indirect controllers of News Corp.

(And another thing: On November 1 last year I reported on a rumour doing the rounds in Sydney that Lachlan Murdoch was interested in buying the 25% of the Nine Network not owned by CVC. The story was denied by Murdoch’s camp and yet in this morning’s Australian Financial Review on Page 1, James Chessell asserts that Murdoch “had approached Packer informally about buying PBL’s Media assets in October last year after Packer had announced they would be split from the company’s gaming assets.” Well fancy that: there’s a story about one of the PBL Media assets and Lachlan Murdoch out in the open on November 1 and what does the emerging co media magnate go and do? Why deny it, only to confirm it 10 weeks or so later.)

News would not approve of an early attempt by CVC to get its hands on these Pay TV assets when it was negotiating with Packer to buy the initial 50% stake in PBL Media. CVC wanted to know if the Foxtel and Premier Media stakes came with that and was told ‘no’. News however didn’t raise any objections to CMH holding those stakes after the PBL split, thereby giving its approval of the transfer.

All News has to do (and has obviously done) is to wave the latest deal through by not objecting to it. Which it has done.

The pre-emptive rights are quite draconian.

There are non-compete obligations in relation to the respective interests. There are broad non-circumvention obligations, and all parties are obliged to act in good faith in their dealings with each other of their respective alliances.

Foxtel shareholders (Telstra, News Corp, PBL) are prohibited from disposing of their interest without the consent of the other shareholders.

Doing so triggers various default clauses, including a potential requirement to sell to remaining parties at market value. Premier Media shareholders (News Corp, PBL) are prohibited from disposing of any interest to any party other than ‘intra-group’ entities (i.e. News, PBL and their controlling shareholders). Doing so entitles the non-defaulting party to, among other things, acquire the defaulting party’s stake at a discount to the market value. (ie at a loss).

One paragraph in the agreement detailed in the demerger document says: “No shareholder may dispose of its interest in FOXTEL without the consent of the other shareholders.”

Now the argument being advanced is that control is not changing given that CMH is the old PBL. But I wonder what Telstra might think? Is there something Telstra might want from News to nod this deal through?

Finally, there won’t be any problem in Canberra with this as the adviser, Mark Burrows, is close to Wayne Swan and back in the days of the Keating Government, did an inquiry into the Australian financial system.

The use of Seek shares as pat payment to CMH shareholders is a bit rich: after all they already own the Seek shares! But it removes any competition issues at CMH with News Ltd’s jobs section, careerone.com.au.

There is a potential sticking point: Perpetual has accumulated a 9.44% stake through the Australian equities fund overseen by John Sevior, who held out on Cemex’s bid for Rinker for months and extracted a higher price.

As the deal will have to be done through a scheme of arrangement, James Packer and Cons Press can’t vote their 38% stake, so the Perpetual stake will control the outcome as 75% approval will be needed and that 9.44% stake is the second largest holding.

Murdoch and Packer have already said the effective $4.80 a share is a “final” price, so will Sevior blink?

The FOXTEL business is an alliance between The News Corporation Limited (News), PBL and Telstra Corporation Limited (Telstra). Its objective is to establish a leading business within the broadband video home entertainment sector in Australia on a profitable basis.

PBL and News each have a 25% indirect interest in the FOXTEL business, via Sky Cable Pty Limited, an entity owned by Premier Media Group Pty Limited which is in turn owned as to 50% by PBL and 50% by News. Telstra holds the remaining 50% of FOXTEL through Telstra Media Pty Limited.

The FOXTEL board comprises nine directors; four are appointed by Telstra, two by News, and two by PBL.

The ninth member of the board is the CEO, who does not have a vote. Telstra is entitled to appoint the Chairman of the FOXTEL board, and a “senior management officer”. News is entitled to appoint the CEO, and PBL is entitled to appoint the CFO. The CEO has significant delegated authority to conduct the business of FOXTEL in accordance with its business plans. Resolutions of the board are made by majority vote including the affirmative vote of at least one director appointed by each of PBL, News and Telstra.

News, PBL and Telstra must fund FOXTEL to achieve FOXTEL’s prevailing business plan (as approved by them).

No shareholder may dispose of its interest in FOXTEL without the consent of the other shareholders.

If an event of default occurs in relation to a shareholder there are various consequences including a potential requirement on a defaulting party to sell its interest to the non-defaulting party at market value.

There are currently broad non-compete obligations owed by News, PBL and Telstra in relation to interests in subscription television in Australia, subject to specific and complex exceptions.

There is a broad non-circumvention obligation owed by each of News, PBL and Telstra. News, PBL and Telstra are obliged to act in good faith in their dealings with each other in respect of their alliance and FOXTEL.

The FOX SPORTS business is carried on by PMG. The business involves establishing, operating and supplying subscription television channels (primarily involving sports programming) to pay television operators (including FOXTEL).

As noted above, PBL has an effective 50% interest in PMG. The other 50% of PMG is owned by News.

News and PBL may each appoint three directors to the PMG Board. Voting on the PMG board is unanimous for all decisions concerning the FOX SPORTS business except for decisions on specified matters involving a conflict of interest. Each director of PMG is required to act in good faith in the best interests of PMG and the businesses it manages.

News appoints the CEO of the FOX SPORTS business, who has specified delegated authorities relating to that business. PBL is entitled to appoint the CFO of the FOX SPORTS business, subject to the approval of the CEO. News and PBL are required to consult with each other regarding their proposed appointments (and removal of those appointments).

PBL and News are obliged to fund PMG and Publishing Services Australia Pty Limited (PSA) upon request from the CEO of the FOX SPORTS business in the same form and by equal capital contributions, so as to fund approved budgets and business plans, in proportion to their shareholding in PMG.

PBL and its affiliates are prohibited (as are News and its affiliates) from holding an interest in a business of providing subscription broadcasting services, producing and providing channels to such a business, or acquiring rights to supply channels of television programming and providing them to such a business other than via PMG.

The shareholders of PMG and PSA are prohibited from disposing of any of their shares in PMG or PSA, subject to ‘intra-group’ exceptions which apply to News, PBL and their controlling shareholders.

News and PBL will retain continuing funding, non-compete and guarantee obligations after such a transfer. Failure to comply with the restrictions on disposal described above is an event of default which entitles the non-defaulting party, among other things, to take control of PMG, PSA and Sky Cable and to acquire the defaulting party’s interest potentially at a discount to market value.

Peter Fray

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