Monday, April 30, 2012

As we expected, Murdoch Rejects Sale of Newspapers, Stock remains like the company mired in scandal

From the NY Times, April 30, 2012
"Scandal and Scrutiny Hem In Murdoch's Empire
Pressure was put on News Corporation, mostly by investment bankers specializing in the media sector, who suggested that the best way to win government approval for the deal would be to sell or spin off its embattled British newspaper unit, News International, to help ease lawmakers' concerns about Mr. Murdoch's company owning the country's largest satellite TV operator.
Mr. Murdoch rejected those proposals, according to a person involved in the discussions who was not authorized to comment publicly on the conversations."
As we expected, Rupert Murdoch, rejected the notion of selling the UK Newspapers owned by News. Many investors and analysts thought he was almost surely going to spin off the papers and/or reign.
This was never going to happen even in the most dire circumstances, so hopes for higher values based on Mr. Murdoch turning the company over to Chase Carey were ridiculous!
Over the decades, Mr. Murdoch has weathered some pretty violent storms, (including the company's brush with insolvency in 1989) though it seems to me that the phone hacking scandal is among the most severe. The belief that Murdoch could end his commitment to the UK Newspaper properties, which still produce positive cash flow, have no debt, and whose consolidation into "the Docklands" defined his career and his company is to not understand the man at all.
At the same time, it may be that Murdoch simply felt that spinning off the UK Newspapers would not have assuaged lawmakers concerns about the moral fitness of the company to hold the licence for PayTV in the UK. In the aftermath of reports about collusion between a junior member of the government and a company lobbyist, Murdoch probably concluded that no amount of contrition up to and including the spin idea was going to move the government to approve the Sky deal.
In terms impact on the value of the stock, however, is the continuing scrutiny that the company faces in the UK and the effect that further revelations would have in other markets where benign government treatment is a requirement of doing business. Several examples were sighted on the Times article. The State of New York disqualified the company from a Department of Education award because of the scandal and opposition is building according to the Times report to a News bid for a Satellite TV franchise.
Undisclosed behavior in other countries that was more grievous than in the UK--as reported in Russia--could profoundly threaten the equity value of the company even more. We doubt, but cannot rule out, that such acts took place.
In the US, business is very strong--cash flow from the company's TV and Cable assets are growing powerfully with Chase Carey providing steady and creative strategic management. The Balance Sheet is also well buttressed and the company's announced buy back program is easily digestible. Some analysts have welcomed the buy back and others not--mostly because they want the company to continuing to invest in new businesses. In our view, the company is handcuffed strategically because the scandal and investigations and so the buy back is a modest positive but likely not to result in a higher long term value.
News is a family company and that family is the Murdoch family. Over sixty years, shareholders have benefitted enormously from the continuity in management, but value creation has never been a straight line process with Murdoch.

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