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Murdoch the magician is running out of tricks
Rupert Murdoch has a few things in common with Warren Buffett. They are both 81, they both love newspapers and they both run public companies named after their worst investments from the past. Mr Buffett’s is Berkshire Hathaway , a New England textile company, Mr Murdoch’s is News Corp .
The difference is that Mr Buffett still has sufficient credibility with his investors to keep on acquiring newspapers out of a blend of old-fashioned enthusiasm and an eye for a bargain. Mr Murdoch does not and the restructuring of his company is an admission of this defeat.
In the hands of a media mogul such as Sumner Redstone or John Malone, who shuffle assets and balance sheets without a second thought to boost the value of their stakes, the News Corp split would be a convenient tactic. For Mr Murdoch, breaking up News Corp is as wrenching as dividing his entertainment head from his newspaper heart.
It is also a sobering moment for the news industry as a whole. If Mr Murdoch can no longer protect his newspapers within his empire, who else can do so apart from highly-motivated billionaires?
It took years for others at News Corp to persuade Mr Murdoch to divide it up. He was not held back merely by sentimentality about the newspapers through which News Corp grew in the 1960s and 1970s, such as The Sun and the New York Post. Running a unified conglomerate has always been essential to how he has operated.
Mr Murdoch has never wanted, nor needed, to take much notice of the views of non-voting shareholders, since his family controls News Corp. He thought – justifiably, viewed over the entire span of his career – that he knew better about taking risks and living with losses.
The News of the World hacking scandal, which broke a year ago, altered that irrevocably. It showed investors that the papers were not simply an irritation they had to live with but caused harm to the part of the company they liked. The scuttling of News Corp’s bid for the 61 per cent of British Sky Broadcasting it does not already own reversed the synergy between news and entertainment.
Some US investors believe that the BSkyB deal could be put back on the table under the new structure. That is not plausible. Splitting assets into two companies, both controlled by the Murdoch family, will make no difference, at least until Britain’s press ethics inquiry fades. “It’s just a corporate sham. It won’t pass muster,” says one London financier.
The split is intended to address a far deeper problem: deterioration of the news business at a rate that Mr Murdoch cannot justify to investors in his weakened position. The Wall Street Journal is adapting to digital technology better than newspapers in the UK and Australia, which have been heavily affected by weakness in print and digital advertising. But even its progress is not sufficient to justify the $5.6bn that he spent on Dow Jones in 2007.
News Corp’s answer to its dissatisfied investors is to exchange them for another set. When the two halves of News Corp are spun apart, growth investors in the news side will sell to value investors who like to acquire assets cheaply in the hope that they can be fixed.
But conditions have changed significantly for the worse since that idea was first mooted (and blocked by Mr Murdoch) several years ago. Plan A was to use cash flow from the print businesses to load that half of the company with debt, releasing a pot of equity for the entertainment side – like a private equity deal carried out in public.
We are now seeing Plan B. Amid the excitement at Mr Murdoch’s shift on Tuesday, investors overlooked the fact that the news division is no longer sturdy enough to finance its own investment needs. “We will need to navigate some treacherous shoals,” says one executive.
The equity pot will therefore need to be passed in the opposite direction – from entertainment to news. Not only will hundreds of millions need to be set aside to cover the remaining legal liability from phone hacking in the UK, but some of News Corp’s $10bn cash pile will be allocated to the news side for digital investments.
Like a costly divorce in which the alternative feels even worse, News Corp’s growth investors will tolerate this providing they can finally exit from a business in which they have little interest. Indeed, given that Mr Murdoch still controls News Corp, they won’t have a choice.
Investors in the news company will, however, get something in return – a greater influence on how it is run. In theory, the Murdochs will control it as tightly as they control News Corp now, given that Mr Murdoch will probably become its executive chairman. In practice, the good and bad parts of the news side will be more exposed.
Mr Murdoch, being no fool, knew this. It is presumably one of the reasons for him resisting the change in the corporate structure until now. Investors put up with the losses at papers such as the New York Post while growing divisions such as Fox News compensated for them. They will be less sanguine when the financial duds are part of a smaller, weaker company with revenues falling in double digits.
Berkshire Hathaway is big enough, and Mr Buffett a sufficiently devoted and credible owner, to give his papers the chance to survive the digital wave. “Berkshire will always maintain capital and liquidity second to none… You will determine your paper’s destiny; outsiders will never dictate it,” he wrote to the publishers and editors of Berkshire’s papers in May.
Until a year ago, Mr Murdoch could have written the same thing to his own editors and been believed. He cannot now.