A week ago the Fairfax papers carried stories about how an AMP capital fund manager, Jim Reid (a former News Corporation journalist by the way) had reportedly accused Rupert Murdoch of being a “value destroyer” at a meeting with analysts at News’s Holt Street offices.

The AMP hummed and harred and played down the story, but The AFR reported today that Mr Reid and the AMP had parted company by mutual agreement.

That looks like gutlessness from AMP, and a rollover to the might of News Corp that flies in the face of market performance. Jim was right of course, and seems to be about the only person in the sorry saga of News performance prepared to tell the truth.

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Up to around 11.30 today, News shares had fallen to a new 52 week low of $12.04, down 46 cents so far on the day. That’s around $A2.4 billion off the total market value of News Corp here. If that’s not value destroying, what is?

With a 52 week high of $25.06, Mr Murdoch is in deed living up to the “capital destroyer” description: it’s a 50% plus fall from the highs of a year ago when he was taking over the The Wall Street Journal. That has proven to be a high-cost, low-yield takeover: the price was around $A6 billion, depending on exchange rates at the time (it’s a lot more with a 67 US cent Aussie dollar).

But the reason for the latest 24% plus fall in the past day and a bit of trading was a briefing given by Rupert Murdoch himself and reported here yesterday, that detailed poor September-quarter earnings for News Corp. He even talked job cuts.

Just when did Mr Murdoch and the News Corp board become aware of the downturn in earnings?

They fell 9% before losses on a German pay TV business were factored in, which took the operating income loss down 30% for the quarter. He blamed weak advertising income at US free to air TV stations, lower returns from films and lower returns from his newspaper operations, especially in Australia, for the downgrade which turned a 4%-6% rise for the year into a fall in the “mid-teens’.

There’s also the way he revealed the downturn: not in a written statement, but during a teleconference early Thursday morning. You have to ask why the changed outlook wasn’t reported in the filing with the ASX yesterday, as it is with many other companies.

Or failing that, why it wasn’t mentioned at the News AGM in New York on October 21? After all, many Australian companies have been providing first quarter and first half (and even full year) earnings updates (including downgrades) at AGMs. Seek and Leighton Holdings chairmen did at their respective AGMs yesterday, for instance.

It’s not that Murdoch wouldn’t have known on October 21 what had happened in the September quarter. TV advertising has been cutting since the first quarter and have lopped upwards of 40%-60% off their spending, the drop off in newspaper sales was apparent, especially at the New York Post, in London and especially in Australia. And Murdoch is well known for demanding weekly financial reports from across the empire.

One of the regulators should actually send a letter to News questioning just when the knowledge of the September downturn was available and when the decision was made to cut the earnings outlook to a downturn.

The impression Murdoch gave to the October 21 meeting was very, very different to what we heard on Thursday. Here’s what he said then:

We have strengthened our balance sheet at the same time we have strengthened our businesses. The result is that we have a war chest of approximately $5 billion in cash, and have extended our average debt maturity to more than 22 years.

In uncertain times, this capital reserve gives us stability. It also gives us the flexibility to take advantage of opportunities all around the globe that our competitors might not be in a position to act on right now. We intend to continue to reevaluate our mix of businesses and seek new growth drivers to ensure that we have the right balance geographically … the right balance across different business sectors … the right balance between advertising-supported and subscription-based businesses… and, true to our long-term strategy, the right balance of companies at all stages of development.

This strategy, coupled with more than a half century of experience, will help us weather the economic storm ahead. It will also guide our decisions as we look to increase our subscription-based businesses … focus on the next generation of digital properties … and expand our role in places such as India, Eastern Europe, and Asia.

So it’s no wonder the news reports were full of talk of Murdoch looking for ‘acquisitions’. The shares from from more than $A14.50 after the meeting as the markets still sold off, steadied around $A13.50 and then climbed back over $A16 late last week.

The impression was that Murdoch’s empire was weathering the storm and was looking to exploit the misery of others.

But not so. In fact the SEC filing overnight of the quarterly results discloses that while the Wall Street Journal lost $US4 million in the quarter, it also added “Around $US500 million” to group revenues. If those revenues hadn’t been added, News would have reported a shortfall in revenues for the September quarter of around $US60 million. Not much, but enough to worry big investors.

Lack of continuous disclosure is one of the reasons why Murdoch opted to take US citizenship and head a Delaware Corporation in the US, cheered on by the same gang of finance journalists here who demand that our companies maintain continuous disclosure.

And finally, a word today from one of News Corp’s current Australian supporters: Goldman Sachs JBWere — which two weeks ago today issued a set of gloomy forecasts for Australian media companies for 2009 and 2010, but selected News (along with Telstra and Austar) as their choice stocks in the communications and media sectors.

“We cautiously retain our BUY recommendation,” Were’s said in the note to clients this morning.

Clearly, both we and the market significantly underestimated the magnitude of the cyclical decline and the leverage of News Corp. While difficult to predict that this is the cyclical bottom, we note the extent of the downgrade to guidance suggests that management has been cautious in the revised outlook. On a 12-month view, the structural drivers of longer term earnings growth remain intact and, in our opinion, remain undervalued versus the broader market and peers.

“The largest surprise in the result was the extent by which management reduced expectations for earnings in FY09. Earnings guidance for FY09 was reduced from +4-6% growth to a decline of “low to mid teens”. Television was down 70% on pcp and 55% below our estimates. The strongest performing businesses were those with a low level of advertising exposure and a high subscription revenue base such as Sky Italia and Cable Networks.

That sounds a little plaintive: by rights News should now be on the same list as Fairfax, Seven and Ten networks and APN at Goldies: unwanted and on suspicion.


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Peter Fray
Peter Fray
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