November 29, 2022

Investors Agree: News Corp/Fox Merger is Bad For Them

Despite having a nearly 40% stake in both businesses, the Murdoch clan may not be able to complete their proposed News Corp. and Fox merger due to a slight rule in their holdings.

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Now let’s begin…

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A month ago, I wrote about why News Corp and Fox merging was being proposed and why I believed the alternative should happen: News Corp should spin off assets. And I basically said that the deal was a fait accompli because of how much of both companies the Murdochs own.

However, in a recent piece by The Wall Street Journal, a small nugget was dropped that’s worth exploring:

Mr. Murdoch’s family trust controls roughly 40% of the voting rights of both companies. Both have dual-class structures, with the family trust mainly holding class B shares, which have more powerful voting rights.

News Corp has said a majority vote of the stock of non-Murdoch-family shareholders is required for the deal to go through.

That second paragraph changes a lot because it means that the companies will have to convince the non-Murdoch shareholders to approve the deal. I spoke with one reader who told me that The State of Delaware has become much stricter with these sorts of deals where a single shareholder owns such a large chunk of the equity. This is meant to ensure minority shareholders get what a business is worth.

Multiple investors have said publicly that if a deal goes through, it’ll need to value News Corp much higher than it currently trades at today.

In a letter to News Corp management, Irenic Capital, which owns 2% of the Company’s Class B voting shares, said:

We invested in News Corp prior to the disclosure that the Company had received a proposal from Rupert Murdoch and the Murdoch Family Trust to recombine with Fox Corporation (“Fox”). We made our investment because News Corp owns a great – yet disparate – collection of assets that is worth far more than the Company’s current trading price of approximately $18 per share. Based on our analysis, News Corp is worth ~$34 per share today.

The Special Committee is tasked with evaluating a proposal from the Company’s dominant shareholder, who has economic interests on both sides of its proposed recombination transaction. In fact, this shareholder’s economic ownership is weighted more on the side of Fox than on the side of News Corp. As a consequence, this shareholder’s interests are fundamentally different from the interests of the Company and the independent shareholders to whom you owe your fiduciary duties.

In other words, the company works for all shareholders, not just the largest one, so it should do what is in the best interest of all the shareholders. That makes sense.

In the above WSJ piece I referenced, the journalists reported:

Independent Franchise Partners, a London-based investment firm and one of the largest non-Murdoch holders of both News Corp and Fox, said it told a special committee of News Corp’s board last month that it thought a combination on its own would fail to realize the full value of the company. It believes any combination should be done in conjunction with the sale of some of News Corp’s most valuable business units.

The investor holds a roughly $700 million stake in News Corp, with around 7% of the A shares and 6.6% of the B shares. It also holds around 6% of Fox’s A shares.

We’re starting to see a trend here.

Then there’s T. Rowe Price, which is often very quiet about its feelings regarding deals, told The New York Times:

T. Rowe Price, which owns about 12 percent of News Corp — making it the company’s largest shareholder after the Murdoch family — said in an interview with The New York Times that a merger of the two companies would probably undervalue News Corp, which it believes is trading for less than the company is worth. It also said that because the Murdoch family owns a bigger share of Fox than News Corp, the family’s interests may lie more with Fox.

That’s a lot of shareholder equity between the three entities. When looking at the combined company, it’s a little over 20% of the company. But it starts to get very complicated from here.

First, nearly 40% of the total shares don’t vote since it’s Murdoch’s shares. So that means that ~20% becomes a much more significant percentage of the vote.

Second, who will actually be allowed to vote? T. Rowe Price owns 12% of News Corp through its Class A shares. Independent Franchise Partners owns 6.6% of the Class B shares. These B shares carry more weight from a voting perspective. However, according to NYT’s story, “depending on how the deal is structured, both Class A and Class B shareholders in News Corp would have a vote.”

An anonymous reader reached out to me and said that unless the deal is “fair,” there already appears to be shareholder opposition if both the Class A and Class B shares get to vote. It gets particularly murky if only the Class B shares get to vote, in which case the deal could go through (we don’t know what other B Class shareholders are thinking).

If that were to happen, T. Rowe would likely sue. And that then throws chaos into the entire process.

What is abundantly clear is that something has to happen with News Corp, even if this deal isn’t it. Irenic put together an in-depth presentation that shows why News Corp should be trading for ~$34 per share, up considerably from the ~$18 it closed yesterday. It values Dow Jones on its own at $16.01/share.

As I wrote a couple of weeks ago:

And herein lies the problem. When investors are confused, they undervalue an asset. News Corp struggles from this blended revenue scenario where it’s hard to glean where the strengths exist.

Sure, Irenic did the analysis and found that News Corp should trade at $16.01/share on its own, except it’s not on its own. So, you can’t invest in News Corp with the rational understanding that the parts are worth what their contemporaries trade for. To realize this sort of value, spin-offs of some sort would have to occur.

But now that investors are getting so vocal, something will have to happen. Investors have been pushing for selling its real estate assets, with others suggesting Dow Jones is a unique asset worth spinning off. Whatever happens, it doesn’t look like the Murdochs will get their mega-merger.

I will say that News Corp is increasingly looking like a compelling business if you believe investors will push management to act. But what do I know? I’m not an equity investor, nor is this financial advice.

Individual newsletters merging

When Puck launched, every “personality” got their own newsletter. But as the company has continued to mature, it is beginning to recognize that this strategy might not be the best thing for the business over the long term.

According to Axios:

Puck, the subscription newsletter company that launched in 2021, is consolidating its three political newsletters authored by Tina Nguyen, Tara Palmeri and Julia Ioffe to create one unified DC-focused product called “The Best & The Brightest.”

The newsletter, which will publish Monday–Thursday, will be sold weekly to one advertiser for roughly six figures, a similar model used already by many D.C.-based publications.

This makes perfect sense for two reasons. First, the sales team goes from needing to sell three products to only needing to sell one, which simplifies things. Two, having a more extensive list gives it a competitive advantage because it can tell a story about how it hits so many influential decision-makers in the DC market. Across three products, it had 75,000 subs. Now it has that in one list.

This is the natural progression for these personality newsletters. It might irritate the individuals, but it’s the best thing for the business. As the story goes: First we bundle, then we unbundle, and then we bundle all over again.

Now, if only the streaming platforms would let me bundle…

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