With strategic acquisitions by Lachlan Murdoch putting News Corporation and Fox in a strong financial position, and a float of Foxtel expected next year, power is shifting in the media dynasty. By Paddy Manning.
Lachlanland: the power shifts in the Murdoch dynasty
As Rupert Murdoch steps back from day-to-day management of the empire he built at Fox and News Corporation, its future under the leadership of his eldest son, Lachlan, is taking shape.
“What you’re seeing is a gradual passing of the baton from Rupert to Lachlan,” a News Corp insider tells The Saturday Paper, “which we never thought would happen.”
It’s been a busy fortnight for News Corp, which Lachlan co-chairs alongside his father. The company unveiled a $US1 billion share buyback; a new agreement to cap the voting power of its controlling shareholder, the Murdoch Family Trust; and removal of a “poison pill” provision preventing a hostile takeover, in place since the company was spun out of the Murdoch empire in 2013.
These announcements come after News reported a solid 26 per cent jump in earnings before interest, tax, depreciation and amortisation (EBITDA) to US1.27 billion in fiscal 2021, and as the company hurtles down the road to a sale of its majority-owned pay TV arm, Foxtel, billed as Australia’s largest media business by revenue.
Announcing the buyback, News Corp chief Robert Thomson said the “landmark decisions follow our most profitable year since the launch of the new News Corp in 2013 and are a tangible sign of our confidence in the inherent value and enormous potential of our businesses”.
In a super-slick presentation on Thursday, replete with cameo appearances by the likes of Hugo Weaving and Leah Purcell, Foxtel boss Patrick Delany would not confirm that the company would float on the ASX, saying only that it was “a matter for the shareholders”. An initial public offering of Foxtel shares is all but certain to go ahead, however, with investment banks appointed and a tentative listing date set for early 2022. The float reportedly could value Foxtel as high as $4 billion, with News (65 per cent) and Telstra (35 per cent) selling their combined stake down to about 30 per cent.
Opening the presentation, Thomson told investors Foxtel’s business was burgeoning and had “decisively debunked the myth that only a small proportion of the Australian population will pay for programming”. Roughly three-quarters of households now subscribe to a streaming service, and that proportion is climbing. With its new “plug and play” internet-enabled IQ5 set-top box, which allows subscribers to watch Foxtel and other streaming apps such as Netflix and Stan, the company hopes nearly one in two households will sign up.
Foxtel’s most senior executives lined up to trumpet the company’s transformation into a cash-flow-saving machine over the past three years, including through aggressive cuts to roughly 800 jobs and nearly 10 per cent of costs, generating $250 million a year against revenue of $2.8 billion. The launch of single-genre streaming services Kayo (sports) and Binge (entertainment) have taken total subscribers to four million households – up 1.1 million in the past year – and within weeks the much-touted news service Flash will be added to the offering.
In presentation after presentation, Foxtel’s top executives hammered home the message that the company is nothing like the legacy pay TV business it was five years ago, when a float was considered and abandoned. Yet traditional subscribers still account for roughly 90 per cent of revenue and, while Foxtel’s linear pay TV business still has strong cash flows, it remains structurally challenged by streaming.
Although he is cautious on Foxtel, Morningstar analyst Brian Han believes there is a reappraisal of News Corp going on. Shares began tracking upwards when the company broke out the performance of Dow Jones – the division including The Wall Street Journal – a year ago. Investors realised they’d been “ignoring the crown jewel [the Journal] is more profitable than The New York Times”.
That was the beginning of a re-rate, as investors realised that, although the rest of the company’s newspaper businesses remained challenged, there was a pathway to profitability especially once revenues came in from the digital platforms, and their implied value was marginal anyway. “Meanwhile digital real estate was still growing – that’s a tick,” Han says. “Books – people are reading more in the pandemic. Tick. All these things were getting ticks, and the only thing that wasn’t is the Foxtel business. But in the pandemic, people were suddenly watching their streaming services, so that’s why they are trumpeting the growth now. While the sun is strong, they want to make hay.”
Han has a degree of scepticism concerning the share buyback, however, saying that last time News Corp announced a $US500 million buyback the company bought shares worth only 14 per cent of that amount. “Just because they announce a buyback, doesn’t mean they have to do it.”
News Corp shares jumped 8 per cent on the day of the announcement and have held onto most of that gain. News Corp shares have risen more than 80 per cent in the past year, closing at $33 on Thursday and valuing the company at $19.6 billion.
At a recent banking conference Thomson denied that the share buyback meant News would forgo mergers and acquisitions, saying, “certainly not, we will be opportunistic as we have been when the right sort of company comes up with a right sort of price … We’re in the market. We’re a buyer. And look we are constantly reviewing our portfolio.”
Analysts are still weighing the significance of the corporate governance initiatives at News Corp. Capping the rights of the Murdoch Family Trust to 44 per cent mirrors a similar provision introduced at Fox two years ago. There was a mixed reaction to removal of the poison pill. Macquarie Capital analyst Darren Leung told The Hollywood Reporter both moves were a boost for small investors. “In essence, the cap to minority shareholders is removed [15 per cent] and should allow greater equity participation on the register,” he said. “The change to share structure is important as it allows a potential aggressor to agitate for change given sufficient capital and/or support from other investors.”
By contrast Dean Paatsch, chief executive of proxy firm Ownership Matters, which advises superannuation funds on corporate governance, says removing the poison pill changes nothing: “They can put it back on again tomorrow, because the constitution allows them to do it.”
Likewise the 44 per cent cap on the voting power of the Murdoch Family Trust could be lifted under a revised agreement with News Corp. “It’s a distinction without a difference, anyway,” says Paatsch. “They already appoint everybody on the board. Every person on the board is a hand-picked Murdoch acolyte.”
Han also is unconvinced, and says removing the poison pill would’ve been more useful when the share price was depressed, trading below $US10, but it would not achieve much at the current elevated level. “They want the market to know, ‘We’re listening to your concerns on governance.’ ”
Financially, Fox and News Corp are in increasingly good shape, helped by a string of acquisitions made with Lachlan Murdoch at the helm. The Financial Times last month tallied some $US7 billion in acquisitions across both companies on Lachlan’s watch since 2019, describing him as a “serial dealmaker”. At News, those include the purchases from Investor’s Business Daily, the Oil Price Information Service, the books and media segment of Houghton Mifflin Harcourt, and recently the gossip website TMZ.
Fox Corp unveiled a bumper profit result for 2020-21, with annual earnings up 16 per cent to $US2.8 billion, and has benefited from the acquisition of the free, ad-driven streaming service Tubi, as well as investments championed by Lachlan in betting companies Flutter Entertainment and FanDuel.
Fox Corp’s non-voting shares are up almost 45 per cent in the past year, closing this week above $US40, valuing the company at more than $US22 billion.
Bank of America analysts described the result as a “clean beat” of expectations “across the board”, citing the explosive growth potential for Fox as “the best-positioned media company to benefit from sports betting”.
Lachlan, who turned 50 in September, was in England a fortnight ago for a belated celebration of his father’s 90th birthday, which fell in March. Rupert and his fourth wife, Jerry Hall, welcomed some 150 family and friends to their £11 million Georgian palace west of London, and watched a video featuring tributes from British Prime Minister Boris Johnson, as well as former Australian prime ministers Tony Abbott and John Howard.
If News Corp can execute its buyback, and at last pull off the float of Foxtel, there will be plenty more for Lachlan to celebrate. To use an analogy from his beloved rugby league, Fox and News are putting in some hard yards up the middle of the field, and much of the corporate success could be sheeted home to a series of decisions taken under his direction. “Put everything together,” says a News Corp insider, “and what you’re seeing is serious change in the two companies overall.”
This article was first published in the print edition of The Saturday Paper on Oct 2, 2021 as "Welcome to Lachlanland".
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