If Telstra wants to float or sell all, or part, of its 50% stake in Foxtel, significant changes in financial and corporate governance will be needed.

There’s a tax-effective loan by Telstra and News to Foxtel (taken on a few years ago), which delivers the partners more than $50 million a year each in a tax-effective way (it is more valuable to News than the much larger Telstra). Then there’s the management structure, which allows News Corp power over Foxtel’s CEO and senior management (News appoints/approves them), while Telstra has the same power over the chairman’s position. On top of that, there’s the less than arm’s-length program supply arrangement between Fox Sports, 100% owned by News Corp and Foxtel (50% owned by News). And the most powerful potential roadblock is News Corp’s first right of refusal over Telstra’s stake, which means it can block a float if it wants to.

How much is Telstra’s share worth anyway? Fairfax and the ABC have put the value at something like $4.5 billion, but that is pie in the sky.

On ABC TV’s News Breakfast this morning, Telstra CEO Andy Penn described Foxtel as “strategically important” to the company, but he would not comment on this morning’s stories on a possible sale of all or part of the 50% stake, saying they were “speculation”. But back in the early 2000s, when Telstra was trying to buy the Nine Network, the stories were described as “speculation”, only to be confirmed at a later date after the discussions had failed.

Telstra’s partner, News, certainly does not want Telstra to sell its stake in their joint venture. It would introduce outside shareholders into the Foxtel/Fox Sports profit centre, which, in reality, supports News Corp’s loss-making Australian papers and has enabled the company to soften the blow from the current slide in ad revenues (apart from last year’s loss of 55 editorial jobs and cuts of 5% to the group’s core operating costs). Floating Foxtel on the ASX would introduce higher levels of corporate disclosure and governance than News and the Murdochs have been prepared to wear — hence the move of the empire’s domicile to the business-easy US state of Delaware a decade ago. The Murdochs objected to the way the ASX and other regulators were forcing more disclosure and tougher rules of corporate governance on Australian-listed companies, especially companies with two classes of shares, one of which comes with voting rights, the other with none, like at News.

The easiest solution would be for News Corp to exercise its right of refusal and buy Foxtel, but it can’t without raising billions more in debt and capital. That’s impossible at the moment given the way subscription TV (cable in the US) is under pressure from the likes of Netflix. News can find a “friendly” partner to buy Telstra’s stake, but again that would be a multibillion-dollar commitment to a slow-growing market in Australia, where Foxtel’s business model is under pressure and subscriber numbers to its pay TV services haven’t grown much (not including the subscribers to the Presto joint venture with Kerry Stokes’ Seven West Media).

Kerry Stokes can’t buy it (even though he would be interested given the way he bought into James Packer’s Cons Media ahead of News Corp buying that company for its 25% stake in Foxtel and 50% share of Fox Sports) — Stokes doesn’t have the money either and would have to give up or dilute his control of Seven West Media to raise the cash. Anyway, News Corp is now telling the world that its future growth is in online property (REA Group in Australia and Asia, Move in the US, digital ventures such as Storyful in Ireland and the UK, and other smaller digital businesses). Newspapers are a shrinking business (publishing in the shape of Harper Collins has been doing well despite the growth of e-books) and pay TV in Australia is a slow-growth near-monopoly, which is a business model the Murdochs love for its cash-producing potential.

And any purchase of Telstra would need a capital raising for News to help rebalance the company and that would put the Murdochs’ control of the whole group under pressure. One solution would be to spin off the real estate operations to raise cash, but that would be giving away future growth (and share price gains). News Corp shares are down 23% in the past year; that’s an accurate assessment of News Corp’s future by investors and would make any deal for the other half of Foxtel costly and very problematic.

Peter Fray

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