Friday, June 8, 2007

Publishing stocks: Why Wall Street loves Rupert Murdoch

By Conrad de Aenlle (International Herald Tribune)

Depending on whom you talk to in the publishing industry, Rupert Murdoch is a visionary who understands where the news business is headed and has a plan to lead the way there. Others view him with an unconcealed disdain that suggests that his native Australia is not the place Down Under where they think he belongs.

Investment professionals tend to be among those holding the first opinion, although lately their admiration for Murdoch has not extended to a desire to own shares in his company, News Corp. The second camp is populated with, among others, Murdoch's rivals in the media business, including the Bancroft family, which controls Dow Jones and its marquee property, The Wall Street Journal.

The Bancrofts announced as soon as News Corp. offered to buy Dow Jones on May 1 that they would not sell, fearing for the journalistic integrity of their flagship paper. Nevertheless, some family members finally sat down with him this past week to discuss the proposal.

No deal had been announced as of press time for this article, but with News Corp. offering $60 a share for a company that was trading in the $30s immediately before the bid, it is easy to see what would be in it for shareholders.

As for what's in it for Murdoch, analysts say he wants The Journal to be able to supply content to the financial television network that he is believed to be eager to develop.

Many in the newspaper business share the family's low opinion of Murdoch. His detractors contend that he has dumbed down some of the titles he has acquired, like The Times of London and The New York Post.

He did not endear himself, either, to newspaper employees when he moved The Times to far cheaper quarters in the East End of London in the 1980s and stripped the paper's unions of much of their considerable power. But his actions allowed The Times and the other British papers that followed his lead to continue to make money, and it might have ensured their survival.

Establishing a new and more commercially viable order by jettisoning the existing one was typical of Murdoch. Such gutsy displays of business sense have helped him to establish a worldwide media empire, encompassing television, film production and book publishing, along with his newspapers. His ability to achieve so much while many of his rivals have been forced to retrench is why he is admired on Wall Street, though not on Fleet Street.

"News Corp. is the one media group that really gets it," said David Winters, chief executive of Wintergreen Advisers, a fund management firm. Murdoch "has built the only global media company that not only encompasses traditional media but such things as satellite TV, and he seems to have made a successful foray into the Internet."

The "it" that Murdoch's company gets is the future of media. Twenty years ago he foresaw the much more competitive environment that might have rendered the featherbedded London papers obsolete without significant change.

A generation later, through its purchase last year of the social networking Web site MySpace.com and other Internet properties, News Corp. is preparing for the day when news and advertising are just as likely to be transmitted online as in print or on television.

What Murdoch does not get, at least not for the moment, is any of Winters's money. He owned News Corp. but sold it recently when he decided that the stock had become too expensive.

He is not alone in cutting the shares loose. News Corp. fell more than 4 percent on heavy volume on the day that the bid for Dow Jones was announced. Investors were evidently spooked by the huge premium over the target company's price before the bid.

Shareholders in companies on the receiving end of a takeover offer often argue that the amount is not enough. For one Dow Jones shareholder, Thyra Zerhusen, manager of the Aston/Optimum Mid Cap Fund, the price was more than enough, however. She bought the stock in March and, after recovering from the shock when News Corp. offered so much, sold half of her stake.

"I never would have expected a price like that," she said, adding that investors should "definitely not" buy Dow Jones at current prices.

Zerhusen, like Winters, is a fan of Murdoch and is also avoiding News Corp. stock. "I respect him - he's very sharp," she said. "I'm impressed with that guy financially."

But she agrees that the stock has become overpriced, and she is not impressed with the byzantine structure into which Murdoch has entangled News Corp. and its affiliates. The company tends to have stakes in subsidiaries that have stakes in smaller subsidiaries and so on, which makes it difficult to fathom just what News Corp. controls and what the pieces are worth.

"There's not enough transparency for my taste," Zerhusen said.

The corporate convolution is a deal breaker for other fund managers, too.

"Murdoch certainly has achieved great things, although for us he fails the initial, all-important governance/transparency tests," said Hugh Young, head of equities for Aberdeen Asset Management in Singapore. Young prefers smaller, simpler "cash-generative businesses" like Singapore Press and the Malaysian publisher Star.

Jason Bazinet, who follows News Corp. for Citigroup, would rather focus on the company's growth prospects, which he thinks are strong enough to warrant a buy recommendation on the stock. He anticipates increases in earnings per share of 30 percent this year and again in 2008, sufficient to make its valuation "compelling," in his opinion.

If, as others suggest, News Corp. has become too expensive, shareholders in rival media companies can only wish they had the same problem. News Corp.'s dollar-denominated stock has risen about 40 percent in the last two years, belying the dismal fortunes of most of the sector.

Pearson, which owns The Financial Times and The Economist, has risen about the same amount. But The Washington Post Co. is down about 10 percent over two years; The New York Times Co., which owns the International Herald Tribune, has fallen about 20 percent, as has Gannett, which publishes USA Today; and McClatchy, which bought the Knight Ridder chain last year, has sunk more than 50 percent.

What may be especially disturbing for shareholders of those companies is that the cascades have occurred despite efforts to restructure their operations. Newspapers used to be cash cows, then the Internet came along and stole many of their readers, especially younger ones, and advertisers soon followed. Publishers took plenty of time to recognize and respond to the changes confronting them. Finally they began expanding and improving online access to their content, although they have been slower to lure advertisers to their Web sites.

"The Internet is a fairly small part of their businesses now," said Brian Lund, who follows media stocks for Legg Mason Capital Management.

Online is profitable because newspapers are building their Web sites around content that is already bought and paid for, he said, but the earnings are "too small to make up for declines in other areas."

Legg Mason's portfolios are free of newspaper publishers and are likely to remain so until the companies show concrete signs of a turnaround or until investors begin to abandon hope that one will ever come.

"When market expectations are low enough, we'll buy them," Lund said, "but I have a hard time seeing how things won't get worse before they get better."

Zerhusen has an easier time making a case for investing in the sector. She contends that commentators have been underestimating the marketability of news gathered by major publishers like those of The Wall Street Journal, The New York Times, The Washington Post and The Financial Times.

They are in a better position than the big chains to make money from their content online, she said. She holds The New York Times Co., The Washington Post Co. and Pearson, and she recently bought Gannett, which signaled its intention to make significant inroads online through its purchase of the PointRoll Internet advertising service.

But it is News Corp., which has invested $1.5 billion or so in the last couple of years on the Internet, including $580 million on MySpace.com, that appears to be moving most wholeheartedly into online news. It is unclear just what the intentions are in establishing what has come to be known in jest as Murdoch.com or where MySpace fits in, but it is fair to say that no one ever went broke pandering to the narcissism of teenagers.

"I'm not sure exactly how he's going to monetize this whole thing," Winters said. "But what he has certainly been able to do is capture the interest and enthusiasm of younger people. Murdoch has been far more creative and adventurous in how to address the secular and demographic problems that newspapers have."

He declined to say whether the fall in News Corp.'s share price had brought it close to a level at which he might wish to buy it again. But "as the price comes down, the stock becomes more interesting," he said. "I don't think you want to bet against News Corp."

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