Wednesday, September 11, 2013

Why is a US billionaire punting on Murdoch?

Rupert Murdoch's recently formed international print business, News Corp, has a new 12 per cent shareholder - Southeastern Asset Management - which has declared its agenda as benign, but whose motives still need to be questioned.

Southeastern is the investment vehicle of American billionaire O. Mason Hawkins, who has built a reputation as a value investor who is not afraid of engaging in a bit of intervention after he invests.

His funds don't take a scattergun approach but instead take big bets on situations and keep them for about five years.

One curious element of the foray into News Corp is that Hawkins has targeted the company's voting stock, which is where Rupert Murdoch also focuses his investment.


Murdoch controls both News Corp and its sibling 21st Century Fox through 39 per cent controlling stakes in voting shares.

The two-tiered share structure (voting and non-voting shares) has allowed Murdoch to retain power over the years.

If Hawkins is attempting to gain bargaining power to cut an asset deal, then amassing voting shares would be the weapon of choice. But Murdoch and his advisers have already put in place contingencies to guard against hostile interlopers - having been stung by Liberty Media's John Malone in 2004.

News Corp and 21st Century Fox have placed poison pills in their articles of association that trap any hostile shareholder who buys 15 per cent or more of the stock and limit their ability to make a takeover. That flies in the face of shareholder democracy but preserves the control of the Murdoch family, which has an economic interest of only 14 per cent.

If one makes the assumption that Southeastern Asset Management is looking to extract an asset or two, the most obvious prize would be The Wall Street Journal or the Dow Jones news service.

The British newspaper assets also hold value but they may be of less interest to a US investor.

On the other hand, if the filing to the US Securities Exchange is to be taken at face value and Southeastern is a passive investor, it must see a growth opportunity that has eluded most others.

Conventional wisdom says the growth assets in the Murdoch empire come in 21st Century Fox - in television, cable and film.

When the old and new media assets were separated, there was an expectation that News Corp (housing the traditional print assets) would be shunned by investors. But since the midyear rebirth News has moved up strongly and closed yesterday at almost $18.

Hawkins is known as an investor who moves on undervalued shares with good (undervalued) assets and strong management.

Given that Southeastern bought in when News began trading (post split) in June, it would have already made a reasonable return.

But even after it has taken large write-downs on its assets, News Corp is still not considered to be a value stock, or one that has particularly strong management. Indeed, investors have concerns that Murdoch's children may ultimately assume management control - a latent negative.

And if Mason is looking for a longer-term gain, his thesis diverges from most of the pack.

News Corp holds assets that are mostly in structural decline even though they may experience some medium-term cyclical recovery.

Having said this, all manner of entrepreneurs have invested in cheap newspaper assets over the past couple of years.

Whichever way you look at it Mason's punt is not a large one. Southeastern manages funds of about $US32 billion and the News Corp outlay is less than $US400 million.

The group's returns, although a bit lumpy, have generally exceeded the market over the past 10 years.

Hawkins may be a potential ally for Murdoch, but none of the charted history suggests they have had a prior association.
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