Shares Pull Back Sharply Amid Index Uncertainty; Will Relocation Plan Fail? By HELEN UBELS DOW JONES NEWSWIRES June 25, 2004
SYDNEY, Australia -- Rupert Murdoch may have miscalculated the power of his fellow Australian investors.
With News Corp. shares tumbling to nine-week lows Thursday as the market contemplated the likely removal of the media giant from Australia's benchmark index, analysts said Mr. Murdoch's plan to shift the company's domicile to Delaware may fail dismally later this year.
News Corp.'s goal is to win inclusion in the widely followed Standard & Poor's 500-stock index, chasing a higher share price and a narrowing in the discount of its preferred stock to its ordinary shares. But the index compiler ruled Wednesday that it couldn't allow the company to remain in Australian benchmarks and join the S&P 500, citing a double counting problem.
Further complicating matters, investment bank UBS late Thursday said it may launch a competing series of Australian indexes that include News Corp., should S&P follow through with its threat.
News Corp. ordinary shares fell 4.4% to 12.58 Australian dollars (US$8.65) on Thursday, off 58 Australian cents each after hitting an intraday low of A$12.42. The preferred shares fell 5.1%, or 62 Australian cents, to A$11.58 each, finishing off an intraday low of A$11.41. The retreat was the largest contributor to a 0.5% fall in the benchmark S&P/ASX 200.
The S&P news also was a blow for Australian Stock Exchange Ltd., which counts News Corp. among its largest and most actively traded stocks.
The relocation is far from guaranteed with Australian institutions likely to hold serious sway at a critical vote on the issue later this year. The institutions are alienated by S&P's hardline stance on its index rules.
"Uncertainty is the enemy of stock outperformance," said Goldman Sachs JBWere, downgrading News Corp. to a short-term "marketperform" rating from "outperform."
According to Goldman Sachs JBWere, News Corp.'s exclusion from the S&P/ASX 200 and MSCI Asia index but inclusion in the S&P 500 would result in net selling of about US$7 billion. The bulk of the total selling, A$12 billion-A$13 billion, would stem from the S&P/ASX 200 removal, it said.
The decision on News Corp.'s relocation probably will boil down to a vote by holders of the company's ordinary shares, although holders of preferred limited-voting ordinary shares and options also get to vote. Each of these three votes must be passed by a majority of 75% in terms of number of securities held and voted, and 50% in terms of number of holders who vote.
As the relocation plan is presently structured, the Murdoch family's near-30% holding of ordinary shares and approximate 5% preference stake can't be voted, leaving Mr. Murdoch at the mercy of his fellow investors.
That hasn't always been a pleasant experience for the News Corp. chairman and chief executive. Last year, Mr. Murdoch withdrew a vote on executive options at the annual meeting after fund managers used their proxy votes to protest at the lack of performance hurdles tied to the equity reward.
The ability of Australian institutions to defeat the relocation plan is greatest in the ordinaries, as opposed to the preferreds, according to UBS.
Australian pension funds speak for about 24% of the ordinary shares, according to UBS. With the exclusion of the Murdoch stake from the vote, that gives the funds voting power of about 34%, enough to cause the 75% threshold to fail.
News Corp.'s analysis of its shareholder base suggests Australian institutions don't have quite that much power. It estimates that local funds hold closer to 20% of its ordinary shares, but even that stake represents potentially 29% of all the ordinary shares that can be voted.
Thursday on the Australian Stock Exchange, concerns about an eventual exodus from the stock by fund managers appeared to dominate investor thinking.
However, UBS appeared to save the day for the ASX, with its announcement about the creation of competing indexes to the S&P/ASX series triggering a reversal in its fortunes. After falling 23 Australian cents to an intraday low of A$15.25, ASX recovered to close steady at A$15.48.
Merrill Lynch said that while S&P's stance may hurt the reincorporation vote, it expects the poll to ultimately go in Mr. Murdoch's favor.
The ASX already has proposed a new index that would incorporate News Corp., and the media company may motion for a special exemption to stay in the S&P/ASX 50 and S&P/ASX 200, it said.
