Murdoch Family Values
Investors fear that the News Corp. chief ’s plan to give his sons more power may hamper the company’s profits.
Every October, Rupert Murdoch returns for a day to Adelaide, a sleepy Australian provincial city in which, in 1953, he inherited following the death of his father a small daily newspaper with a circulation of 75,000. The occasion is the annual meeting of News Corp., the business Murdoch has built into an empire with $75 billion in market value. News Corp. includes television stations, movies and newspapers that reach 400 million people in North and South America, Europe, Asia and Australia.
Murdoch, 72, told shareholders that he wasn’t celebrating his half a century in control of News Corp. “I didn’t even know about it until some- body pointed it out,” he said in unemotional, Australian-accented tones. “What truly drives us are the opportunities for the next 50 years.”
Murdoch, who has made himself a billionaire seven times over and gone to the brink of bankruptcy and back again, says he’s going to make more profits by beaming top sports events, movies, reality TV shows and other entertainment via satellite to three-quarters of the world’s population. In April, he agreed to pay $6.6 billion in cash and stock for control of Hughes Electronics Corp., owner of DirecTV, the largest U.S. satellite broadcaster, with 12 million subscribers. The deal, which regulators approved on Dec. 19, gives News Corp. satellite coverage in Europe, with its London-based British Sky Broadcasting Group Plc and Rome-based Sky Italia SpA; in Asia, via Star Group Ltd.; in Australia, through Foxtel Management Pty; and in Latin America, via Sky Brasil Serviços Ltd. and Innova S. de R.L. de C.V., operator of Sky México.
At the News Corp. annual meeting, Murdoch described the DirecTV acquisition as “the missing link in a global satellite platform.”
Investors say their view of the company depends on the answer to the question about who will eventually succeed Murdoch. The News Corp. chief stirred criticism with his recent decisions to make his son Lachlan, 32, deputy chief operating officer of News Corp., and son James, 31, CEO of BSkyB, which is 35.4 percent owned by News Corp. “By putting his sons in charge of key News Corp. assets, Murdoch has hurt the stock,” says Uri Landesman, who helps manage $200 billion, including News Corp. shares, at Pittsburgh- based Federated Investors Inc. “All in all, I’d rather have people without the last name Murdoch. That someone else isn’t going to wind up as CEO is a disaster.”
That view is shared by many investors, says Neil Che- noweth, author of Rupert Murdoch: The Untold Story of the World’s Greatest Media Wizard (Crown Business, 2001). “They believe in the father, but not the sons,” he says. “It’s not going to work once Rupert’s not there.”
Standard & Poor’s rates News Corp.’s debt BBB–, one level above junk. Heather Goodchild, an analyst at S&P in New York says the debt rating reflects News Corp.’s decision to use bonds for financing its expansion. “It could have been rated higher if they had used equity,” she says.
‘By putting his sons in charge of key News Corp. assets, Murdoch has hurt the stock,’ says one investor. ‘All in all, I’d rather have people without the last name Murdoch.’
“The company is looking stronger than it was five years ago,” says Alexander Muromcew, who helps manage $600 million at San Francisco–based Loomis Sayles & Co. “Mur- doch has learned from his past excesses.” News Corp. has $8.55 billion in debt—in bonds and long-term loans—and $4.92 billion in cash. News Corp.’s 9.25 percent bonds due in December 2016 rose about 13 percent to 102.9 cents on the dollar in the year to Dec. 11, according to Bloomberg data.
Murdoch, who declined to be interviewed for this article, has said succession isn’t an issue, because he doesn’t plan to retire. The recent birth of two daughters by his third wife, Wendi Deng, 36, has postponed his retirement plans “forever,” he told reporters in Adelaide.
Stocky, gray haired and craggy faced with bloodhound jowls, Murdoch traverses an empire on which the sun never sets in one of two corporate jets: a Gulfstream 4 and a Boeing 737 with sleeping quarters and a boardroom. He bases him- self mostly in New York, working in a functional office on the eighth floor of News Corp.’s—and the New York Post’s—mid- town headquarters on the Avenue of the Americas and living in a three-story apartment near Lachlan in trendy Soho.
Murdoch, who battled prostate cancer in 2000, has longevity in his genes. Although his father died at age 67 of a heart attack after also suffering from prostate cancer, his mother, Elisabeth, is alive and active at 94. In a 2002 television documentary produced by Australian Broadcasting Corp., in which he is seen pumping iron, boxing with a personal trainer and running on a California beach, Murdoch said he hoped to live to be 120—“but certainly 100.”
Murdoch’s attempts to promote his family’s interests resulted in two shareholder revolts in 2003. At the News Corp. annual meeting in October, Murdoch said opposition by Australian institutional shareholders he did not name had forced him to withdraw a plan to grant stock options to six executives, including Lachlan and James. At BSkyB’s annual meeting a month later, large U.S. and British institutional investors signaled that they opposed James Murdoch’s appointment as CEO by voting against his election to the board. “The whole process has shown a complete disregard for 64.6 percent of shareholders,” Daniel Summerfield, representing California Public Employees’ Retirement System, America’s biggest retirement fund, and Universities Superannuation Scheme Ltd., Britain’s third largest, told the BSkyB annual meeting. James was elected by a 77–23 percent margin.
Murdoch replies that his companies’ earnings speak for themselves, and investors who don’t like it can sell their stock. “If you are not satisfied, look for something better,” he told one shareholder at the News Corp. meeting. News Corp. reported an annual profit of $1.05 billion on sales of $17 billion compared with a $6.27 billion loss in the previous year for the year ended June 30, 2003. In the quarter that ended on Sept. 30, News Corp. profit more than doubled to $422 million from $162 mil- lion a year earlier. The 2002 loss—a record for an Australian company—reflected the $5.8 billion writedown of a 42 percent stake in Gemstar–TV Guide International Inc., a Pasadena, California–based producer of electronic TV-program guides.
BSkyB made its first annual profit in four years—$331 million—in 2002. In the third quarter of 2003, its profit jumped to $152 million from break even in the year- earlier period. Fox Entertainment Group Inc., which is 81 percent owned by News Corp., reported a 35 percent increase in profit to $1.03 billion on sales of $11 billion in the year to June 2003 from $644 million a year earlier. Its first-quarter profit rose 87 percent to $401 million.
Murdoch companies’ shares have delivered a mixed performance. From the start of 2003 to Dec. 11, News Corp.’s American depositary receipts—each equivalent to four common shares—rose 30.9 percent to $34.36, from $26.25. That compares with a 21.8 percent rise in the S&P 500 Index and better than the increases in shares of Viacom Inc., which controls CBS and Paramount Pictures. News Corp. shares on the Australian Stock Exchange were down 1 cent to 11.47 Australian dollars, while the benchmark S&P/ASX 200 Index rose 6 percent.
Fox Entertainment—which includes the 20th Century Fox film studio and Fox television networks in the U.S.—lagged the S&P index in the year to Dec. 11, gaining 8.7 percent to $28.18, from $25.93. In London, BSkyB stock also underperformed, gaining 4.15 percent to 665 pence, from 639 pence, compared with a 9.92 percent rise in the FTSE 100 Index. BSkyB was the fourth-worst-performing stock in the 28-member Bloomberg Europe Media Index.
Buying Hughes—for which Murdoch paid a 22 percent premium over the stock market price—could add $1 billion in cash flow annually for News Corp., says Larry Haverty, who helps manage $47 billion, including $175 million worth of Murdoch company shares, at Boston- based State Street Research & Management. Haverty estimates News Corp.’s share price will rise by at least 50 per- cent in the next two or three years, adding $20 billion–$25 billion to the company’s $40 billion market value, thanks partly to the increasing profitability of BSkyB. “It’s pretty clear they’ve hit a home run,” he says.
Paying high prices to ensure he acquires assets he wants is a strategy Murdoch has used many times throughout his career, Haverty says. “Relative to other people in the industry, he tends to think in terms of much longer cycles,” he says. “His horizon is longer than Wall Street’s.”
Murdoch can afford to think long term because he retains control of his companies even though he owns a minority of the stock. His family investment company, Cruden Investments Ltd., controls 30 percent of the voting shares of News Corp. and only 17 percent of the total stock. That makes the Murdochs the second-largest holder, behind investor John Malone’s Liberty Media Inc., which owns 18 percent. Liberty Media’s shares are nonvoting.
Murdoch can take steps that may not pay off for years. In 1985, he bought 20th Century Fox film studio for $675 million and six Metromedia Inc. TV stations for $1.85 billion, saying he would use them to create a fourth U.S. TV network to com- pete with ABC, CBS and NBC. “People thought he was out of his mind,” says Federated Investors’ Landesman. “It was absolutely an enormous gamble.”
Peter Chernin, 52, chief operating officer of News Corp. and Murdoch’s No. 2, says his boss is willing to make bold bets. “He’s the best strategic thinker in American business,” Chernin says. “He is extremely interested in the world around him. He’s not sitting there following the stock market minute by minute.”
Murdoch also traded his Australian passport for U.S. citizenship in 1985, a move that exempted him from restrictions on foreign ownership of U.S. TV stations. Today, Fox ranks third among the four networks and is No. 2 among the younger viewers, aged 18–49, who are most sought by advertisers. Fox News now outrates CNN in the U.S.
As Murdoch was building a film and TV empire in the U.S. and winning viewers with programs such as The Simp- sons and The X-Files, he continued to indulge himself in his first love: newspapers. In 1986, backed by British Prime Minister Margaret Thatcher, he took on, and broke, Fleet Street’s powerful print unions at four of Britain’s most-famous news- papers: the tabloid Sun and News of the World and the up- market Times and Sunday Times, which he had acquired from 1968 to ’81. Freed of the expensive, restrictive labor practices that afflicted his rivals, Murdoch’s British newspapers—which have a 30 percent market share—became even more profitable.
In 1987, Murdoch returned to his native Australia to purchase the Herald and Weekly Times, the newspaper group his father had once managed. That gave him 54 percent of the Australian metropolitan newspaper market.
In 1989, he made his second big TV bet, launching the Sky network in Britain. Soon afterward, a rival consortium that included Financial Times publisher Pearson Plc set up British Satellite Broadcasting. Both startups struggled. Within a year, the Sky network was losing $20 million a week as U.K. viewers resisted paying for the television station, and Murdoch was forced to merge it with its rival.
In 1990, amid a global economic recession, a contraction in the advertising market and a credit squeeze, Murdoch found himself faced with the prospect of having to ask 146 creditor banks to roll over $7.6 billion of debt he’d accumulated in 10 different currencies. According to biographer William Shawcross, one bank, Pittsburgh National Bank, refused to reschedule a $10 million loan, saying it intended to put News Corp. into receivership. Brian Goerke, spokes- man for PNC Financial Services Group Inc., successor to Pittsburgh National, says, “Our policy is not to comment on current or former relationships.” Pittsburgh National finally agreed to the rollover—“I had to beg,” Murdoch told Shaw- cross—and News Corp. was saved.
The experience didn’t deter Murdoch from more big deals. In 1993, he met on his yacht with Richard Li, 24-year-old son of Hong Kong’s most famous tycoon, Li Ka-shing. The young- er Li had launched Star Television with a footprint spanning 53 countries, but because its five channels broadcast almost entirely in English, it had very few viewers. Attracted by Chi- na’s potential audience of 1.3 billion people, Murdoch swiftly struck a deal to buy a majority stake in Star. He eventually paid $871 million in two installments for full ownership. Murdoch caught on that much of the world’s economic growth was going to come from Asia, Chernin says. He spent a month or two there learning about the region, which led to the investment in Star, he says.
At first, it appeared Li had gotten by far the better deal: Star lost $60 million– $100 million a year for the first seven years Murdoch owned it, says Vivek Couto, a Hong Kong–based analyst at Media Partners Asia. And following a speech in which Murdoch predicted that new telecommunications technology would become “an 100 unambiguous threat to totalitarian regimes everywhere,” China—the country he most wanted to reach—banned *Full name is Innova S. de R.L. de C.V., a joint venture among News Corp., México Grupo Televisa and Liberty Media International. The company operates the Sky México satellite TV system. Sources: Bloomberg, News Corp. Star’s satellite dishes.
The same year, Murdoch removed from Star the British Broadcasting Corp. news service, whose reporting of the Tiananmen Square crackdown had angered the Chinese government. He also turned his attention to India, the world’s second-most-populous country, after China, in which regulations were less restrictive. In 2000, he replaced Executive Chairman Gareth Chang, a Chinese American, with his son James, who introduced Indian audiences to the quiz show Who Wants to Be a Millionaire.
James, who studied at Harvard University before drop- ping out to launch a hip-hop record label called Rawkus, oversaw the turnaround of Star TV before joining BSkyB. “James built up a solid management team,” says Jamie Davis, a former Fox Sports executive whom James named president of Star China. James also introduced a new channel—aimed at younger Chinese viewers—called Xing Kong, or Starry Sky, which is attracting advertisers such as Toyota Motor Corp.
When James left to take over BSkyB, Star had an operating profit of $8 million on sales of $348 million, Couto says. In Asia, Hong Kong–based Star now claims a weekly audience of 173 million via 40 channels in 53 countries. In India, which has a population of 1 billion, Star broadcasts 48 of the 50 top-rated programs, according to New York–based Nielsen Media Research Inc.
In the U.S., meanwhile, Murdoch was expanding—and spending lavishly. In January 1994, he paid $1.58 billion for rights to televise National Football League games, outbid- ding CBS, which had paid $1 billion for the previous four years. The football games gave Fox a powerful lead-in to its Sunday night prime time lineup and gave many small TV stations motivation for affiliating with the fledgling Fox net- work. The number of Fox affiliates rose to 175 from 140 in the nine months after the contract was signed in December 1993, says Lou D’Ermilio, a spokesman for Fox Sports.
In recent years, Fox has relied heavily on reality TV, a low- cost genre that focuses on real people instead of actors as an alternative to dramas and comedies, which cost more. The finale of Joe Millionaire, in which women vied for the love of an ordinary guy posing as a millionaire, was Fox’s highest- rated program in the 2002–03 TV season. The finale of talent search American Idol was No. 2.
Princeton University–educated Lachlan has responsibility for Fox Entertainment’s U.S. television stations group, Fox Tele- vision Stations and the U.S. print businesses, which include HarperCollins Publishers and the money-losing New York Post.
News Corp. as a whole had a profit of $1.05 billion on revenue of $17.4 billion.
Fox holds NFL rights through 2005 under an eight- year, $4.4 billion contract signed in 1998. Fox also has a six-year, $2.5 billion contract with Major League Baseball that runs through 2006 to show Saturday after- noon games plus the playoffs and World Series. Through BSkyB, Murdoch has the rights to broadcast English Pre- mier League soccer, the most popular league in the world’s most popular sport. Through Sky Italia—a pay TV monopoly created last year, when Murdoch paid $977 million to merge his Stream network with rival Telepiù SpA—News Corp. also has rights to Italy’s Serie A soccer. English Premier League soccer is also broadcast live across Asia on Murdoch’s 50 percent–owned ESPN-Star sports channels.
Like his father, Lachlan is a newspaper fanatic. In a speech in 2002, he said that in his New York Post office, he keeps a photograph of himself, at age six, on the New York loading docks holding a copy of the Post shortly after his fa- ther bought the paper. “He’s a nice guy who did a reasonable job in Australia,” says Stephen Mayne, an Australian share- holder activist and former News Corp. employee who worked under Lachlan at the Sydney Daily Telegraph. “He seems to have a deep and abiding love of newspapers disproportionate to the role newspapers now play in News Corp.”
Newspapers are small beer for Murdoch today. They ac- count for only 16 percent of News Corp. revenue compared with more than 70 percent for TV, film and cable TV. In the most recent quarter, newspapers accounted for just 14 percent of the company’s profit—divided about equally between U.K. and Australian papers.
The Post loses money. Murdoch says the results at Sky and Fox show that his sons are well qualified. “So far, they are showing great promise,” he said at a news conference in Adelaide in October. “Lachlan is supervising companies that produced 60 percent of last year’s former employee of Star TV who had acted as his interpreter on trips to China. Deng, who has an MBA from Yale University, sat in the front row at the BSkyB annual meeting in November but holds no official position in the company.
“It has the potential to be an amazing corporate soap opera when you consider there are six children by three wives across two generations,” says Mayne, who owns shares of News Corp. and runs a Web site called Crikey.com.au. “You have a lot of heirs to a fortune of $7 billion. It makes for a potentially messy situation.”
For now, though, Murdoch is aiming to add to his fortune via his latest acquisitions. DirecTV, which lost $893 million last year on revenue of $8.9 billion, should make a profit, says State Street’s Haverty. Murdoch, who lost $1.5 billion of BSkyB money investing in KirchPayTV GmbH in Germany, said at BSkyB’s annual meeting that he hopes Sky Italia, which lost $117 million on sales of $264 million in the third quarter of 2003, will break even in 2004.
Federated Investors’ Landesman says Fox has a better chance of maintaining its stream of profits because it’s in both sides of the television business: content and distribution. By contrast, rival Viacom mostly creates content, and other competitors such as Comcast Corp., America’s largest cable operator, and EchoStar Communications Corp., the second-largest U.S. satellite distributor, specialize in deliver- ing it to viewers’ homes. “Rupert was the first to understand the value of mixing content and distribution,” Landesman says. Murdoch also controls a company, NDS Group Plc of London, that provides the technology that enables viewers to access pay TV services through set-top boxes.
In 2006 and beyond, News Corp.’s ability to outpace its peers will depend on the success of Sky Italia and Star, says Richard Bilotti, a New York–based analyst at Morgan Stanley. Star has a long way to go to generate the revenues of its western counterparts. The average revenue per user at Sky Italia is $550 a year. At Star in India, the figure is $4. In China, it’s only $2, Couto says.
Some investors say they’re prepared to live with nepotism so long as Murdoch continues to deliver profits. “Let’s face it, Ru- pert Murdoch has done a fantastic job at BSkyB,” says Colin Morton, who helps manage $681 million at BWD Rensburg Ltd. in Leeds, England. “If they can continue to run the business as efficiently as they did in the past years, then we’re fine.”
That’s a big if. “I have an ambiguous opinion,” says Patrick Wollenberg, who helps manage $15 billion, including shares of BSkyB and Fox Entertainment, at Robeco Group in Rotterdam. “Murdoch has done a better job in terms of value creation than a number of media executives, but there is always the risk that he is putting his own interests above those of other shareholders.” As long as Murdoch’s succession plans remain unclear, the company’s stock price will reflect that ambiguity.