ruper's shareholders lose out

An interesting article about NCP myths.


Rupert's shareholders lose out
By Alan Kohler
September 22, 2004

No shareholder in their right mind would vote in favour of the News Corp move to the US as it now stands.

The bovver boys in News Corp's papers are aggressively spruiking the deal, as you'd expect, with statements like: "News Corp has to shift to the US. No half sane, half-intelligent person believes otherwise."

In fact, looked at objectively, the reverse is true: the possession of half a set of marbles and half a brain would prompt anyone to vote against it.

That's because for shareholders other than the Murdochs it is a proposal with only vague and illusory benefits but very concrete problems.

The heart of the deal - and possibly its main purpose - is that shareholders are being asked to hand greater control of the company to Rupert Murdoch and his heirs and give up their protection against him, selling control without a full takeover.

In return they get the possibility of a re-rating of the share price in America. As we shall see, that re-rating is smoke.

Once it becomes a Delaware corporation, News Corp will no longer be subject to the Australian takeover threshold, which says that once someone buys more than 20 per cent of a company they have to make a bid for the rest at the same price. That is one of the pillars of Australian corporate law and is designed to ensure all shareholders participate when a premium is paid for control.

It means Murdoch, with just under 30 per cent, could sell out without triggering a full takeover, or he could buy more to cement his control, or he could combine with 9 per cent shareholder John Malone - also without triggering the takeover threshold.

By the way, the otherwise loose Delaware company law prohibits "business combinations" between a company and an "interested stockholder" (someone who owns more than 15 per cent) for a period of three years.

However, the information memorandum reveals that News Corp US "has elected not to be governed by this Delaware statute". Just like that. Apparently they have optional laws in Delaware - amazing. News Corp would not have put that in for nothing.

Another important change is that News Corp US will be free to issue shares with differential voting rights. In 1993 Murdoch proposed an issue of what were called "super voting shares" - that is, shares that would have more than one vote per share until they were sold, enhancing Murdoch's control.

To Murdoch's fury, the ASX knocked the idea back and News Corp issued non-voting preference shares instead. News Corp US would be able to revive the super voting shares idea and, if the ASX cut up rough, it could become a "foreign exempt listed company" in Australia, which means it would not be bound by local listing rules while remaining listed here.

The third important change is that directors can only be removed for "cause", which is defined as moral turpitude, misuse of assets, fraud, embezzlement and so on. Not incompetence or because control of the company has changed hands. Nor can shareholders call an extraordinary general meeting to remove directors.

This means that if someone got control of the company or shareholders became unhappy with directors, none could be removed until they had to stand for re-election after three years. No company would make a hostile takeover offer for News Corp under those circumstances.

The net effect of all this is that takeovers are blocked; Murdoch can sell for a premium without triggering a bid or he can buy more without bidding himself; and he has a blank cheque to issue whatever differential voting shares he wants in order to enhance his control.

In return, shareholders' stock is apparently going to be worth more, although the independent expert, Grant Samuel, is not exactly sure: "The evidence is ambiguous but, on balance, it is Grant Samuel's view that, in time, there should be some positive effect on value from the change of domicile."

Rubbish. As of yesterday, US media stocks were trading, on average at 10.1 times 2004 EBITDA (roughly, cash flow). The average in Australia is 11.8 times. In other words, the average media company stockmarket rating in the US is 20 per cent lower than Australia.

Moreover, its profit will fall under US accounting rules. The information memorandum officially shows that earnings per share will fall from 59c to 55c, or 7 per cent, under US rules. But that's after non-recurring items. Normal profit, according to News Corp's own figures, will fall from 59c to 48c - a drop of nearly 20 per cent.

So that's a 20 per cent lower multiple on 20 per cent lower earnings. Investors probably won't take too much notice of all this: they have been valuing News Corp according to American multiples and accounting standards for years already, so it's unlikely that the share price will drop 40 per cent.

But what absolutely won't happen is an increase in News Corp's share price.

It's one thing to get screwed. Rape is a different matter altogether.