A major consolidation of the Murdoch media empire – shelved last month – could be back on the agenda sooner than most people think. Lachlan and Rupert Murdoch believe a proposed $US40 billion merger of Fox Corporation and News Corporation remains in the best interests of both businesses, according to sources close to the family. They say that consideration of the deal has been set aside only for as long as it takes to complete the sale of United States digital real estate business Move, Inc to online rival CoStar Group.
Media reports have broadly assumed that the merger, proposed in a letter from Rupert Murdoch to the boards of both companies last October, was abandoned in the face of a well-publicised backlash from shareholders.
But The Saturday Paper understands that the concerns of investors and analysts were regarded in the family as premature, given that a formal proposal did not yet exist. The Murdochs were undeterred by the backlash and special committees comprising the independent members of both the Fox and News Corp boards were working on the merger until January, when larger rival CoStar offered to buy Move – which owns the second-largest US property listings website, Realtor.com – for an estimated $US3 billion.
CoStar’s purchase of Move will require approval from the National Association of Realtors, which has a trademark and licensing deal with Realtor.com, and could take more than a year to complete. In a difficult market environment, the opportunity to take a three-fold profit from the sale of Move, which was bought by News Corp and its majority-owned digital real estate subsidiary REA Group for $US950 million in 2014, has proved irresistible.
Fox and News Corp were split in 2013 in the wake of the British phone-hacking scandal. Lachlan and Rupert are said to believe that reuniting the companies would benefit the shareholders and employees of both, and have every intention of revisiting the proposal.
Lachlan appeared to rule out a recombination when he became chief executive of Fox in 2019, telling investors he saw no industrial logic in a merger. But a year ago he called the boards and senior executives of both companies to his Beverly Hills mansion, Chartwell, for a strategic meeting focused on responding to the challenges and opportunities presented by Web 3.0.
Since that meeting, Russia’s invasion of Ukraine, spiking inflation and a major shakeout among US media and technology stocks have reshaped the economic landscape.
Fox delivered an upbeat December quarterly earnings report early on Thursday morning, local time, with ad revenues surging through the midterm elections and FIFA World Cup, and continuing growth projected, given record spending on Monday’s Super Bowl. Fox accelerated its share buyback following the shelving of the merger proposal with News Corp, and Lachlan Murdoch reiterated the importance of scale for Fox, telling analysts that mergers and acquisitions would be considered. “We don’t have anything on the table today, but I think we are in a strong position to capture opportunities when they present themselves. And, obviously, there are other companies in our sector that are not in as great a position that we will cast our eyes over,” he said on the earnings call. “We do expect that M&A will be a more important part of our toolkit.”
Fox shares jumped 5 per cent on the announcement. News Corporation results were unavailable at time of press.
The Murdochs are clearly playing a long game. News of the merger proposal broke on October 14 last year, with Fox and News Corp announcing that after receiving letters from Rupert Murdoch and controlling entity the Murdoch Family Trust, which holds about 40 per cent of the voting shares in both companies, each board had formed a special committee composed of independent directors to explore the proposal. The companies’ statements cautioned that no determination had been made and there was no certainty of a transaction going ahead.
The news sparked a rally in News Corp shares, while Fox stock slumped, and it was soon apparent that analysts and investors were struggling to make sense of the deal. On the Fox Corporation side, there was reluctance to dilute earnings from the Fox News cable TV juggernaut in the US by combining it with a grab bag of legacy, offshore media assets held by News Corp. On the News Corp side, investors argued that Fox itself was problematic – challenged structurally by the move away from cable and the streaming wars, while also facing multibillion-dollar defamation lawsuits from voting machine manufacturers Dominion Voting Systems and Smartmatic in the wake of the 2020 election.
The investor reaction marked a twist in the market assessment of Fox and News Corp, according to veteran Morningstar media analyst Brian Han, since the companies were regarded as “GoodCo” and “BadCo” when they split. “I think the dynamic has arguably turned 180 degrees,” says Han. “Now they were recombining, people were confused: which one is the good News and which one is the bad News? [They’re] not sure anymore. But if you actually look at the financial performance over the past three years, you could argue that News Corp has outperformed Fox, in terms of earnings growth and in terms of margin improvement.”
Han says the investor reassessment of News Corp began before the merger proposal, in 2020 when the company accounts began to split out and highlight the profitability of Dow Jones, the publisher of The Wall Street Journal, now a thoroughly digital business generating stable and growing earnings from subscriptions and advertising.
“That’s when people realised that ‘Oh, wait a minute, this Dow Jones is much more profitable than we thought,’ ” Han says.
Han wrote that a Fox merger was a hard sell for News Corp shareholders. “Ever since they split out from Fox in 2013, their mantra was simplification, digitisation and globalisation. And when you’ve been chanting that since 2013, it’s a real hard sell to suddenly turn around and say, ‘Well, we’re going to recombine with Fox’, which is ultimately a very US-centric company holding assets that are hardly, you know, cutting edge tech [or] structurally strong businesses.”
On November 20 last year, a substantial holder of the voting shares in News Corp, Irenic Capital Management, gave a presentation to the special committee of directors arguing that the company was trading at a massive discount to its true value. The shareholder’s case was that, given the profitability of assets such as Dow Jones and digital real estate businesses REA Group and Move, the shares were worth $US34 each – roughly double their market price prior to the merger announcement. Specifically, Irenic pushed for a tax-effective spin-off of REA Group – which is 61 per cent owned by News Corp – and Move, which is owned 80:20 by News and REA.
Shares in News Corp continued to climb between October and late January, rising more than 20 per cent while the merger was on the table, while Fox shares rose only 3 per cent in the same period – making a merger relatively more expensive for Fox shareholders. Investors hardened their opposition, while awaiting details of the actual proposal.
None were forthcoming. An update from both the Fox and News Corp special committees in December last year reiterated that the Murdoch family would not vote their shareholdings in favour of a transaction unless it was approved by a majority vote of the shares held by non-affiliated stockholders.
And on January 24, both Fox and News Corp announced they had received another letter, from Rupert Murdoch, advising that he and Lachlan had “determined that a combination is not optimal for the shareholders of Fox and News Corp at this time”. That same day, News Corp also confirmed it was in talks with CoStar over a potential sale of Move, operator of Realtor.com, as part of a deal that would “optimise the value of its Digital Real Estate Services segment, while strengthening Realtor.com’s competitive position in the market”.
Irenic welcomed the announcement as a victory, with co-founder Adam Katz declaring he looked forward to working with News Corp to unlock the “considerable value” in the digital real estate business over coming months. Media speculation since has focused on the possibility of a further spin-off of News Corp’s REA Group business, and the potential for future acquisitions once the Move sale is completed.
The Saturday Paper understands, however, that News Corp has no intention of selling its majority stake in REA Group, which Lachlan personally initiated 20 years ago after a beer in Sydney’s Surry Hills with director and real estate agent John McGrath as realestate.com.au was struggling for cash in the wake of the tech wreck.
Lachlan fought head office in New York to buy a 44 per cent stake for $A11 million in 2000, including just $A2 million in cash – and subsequently launched a hostile takeover, raising News Corp’s holding to 61 per cent. He has nurtured the business over the years, backing its overseas expansion and resisting pushes to sell – and REA is now worth $A16 billion.
“My gut feel is that they’ll hold on to REA,” says Han. “It’s a business that Lachlan, basically, that’s his baby, initially. And it is a real cash generator. It is one of the rare, moaty businesses in Australia,” he adds, using a term borrowed from Warren Buffett, meaning the company has a competitive advantage that’s so sustainable over the longer term that it just cannot be broken. “[REA] is the poster child of [News Corp’s] digitisation strategy,” Han says.
He is convinced the Murdochs will again pursue the Fox–News merger. “I don’t think this deal is dead in the water,” Han says. “I think through this round they may have gotten some better idea as to what it will take for the shareholders to be more receptive to a deal – and perhaps next iteration, they’ll get closer to what they want to achieve.
“My observation, from covering News Corp for over 20 years, is that usually the family get what they want.”
This article was first published in the print edition of The Saturday Paper on February 11, 2023 as "Rupert’s other split".
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