I have never heard of a listed company that is solvent suspending voting rights. Maybe it’s happened before, but even for 'corporate governance'-challenged News Corporation, I think this is a first.
News has unilaterally suspended 50 per cent of the voting rights of non-US shareholders who own voting shares. The rationale is to ensure it retains its US Fox TV license, a condition of which is that News is less than 25 per cent foreign owned.
News recently 'discovered' its actual foreign ownership is 36 per cent. By unilaterally reducing the voting rights of these shareholders by half, foreign voting ownership falls to 18 per cent. Highlighting the urgency of the situation, no shareholder vote is apparently needed.
All else being equal this lifts the voting interest of the Murdoch’s family from 39.7 per cent to 48.4 per cent. However the Murdoch family has "generously" offered to cap their actual votes to 39.7 per cent of the voting shares "not subject to the suspension”. I calculate this still gives the Murdochs 43.5 per cent of the remaining eligible votes.
But what if only 75 per cent of the non-Murdoch voting shares are actually voted? Then the Murdoch family’s vote rises again from 43.5 per cent to over 50 per cent. Voila! An unintended consequence which just happens to be a pretty good outcome if you're worried about board control.
This initiative creates three classes of shares. Voting shares allowed to vote (the important ones), voting shares with suspended voting rights ('no soup for you') and, of course, the infamous non-voting shares. Even after almost 206 million ($US3.6 billion) non-voting shares have been bought back, they still represent 67 per cent of News Corp outstanding shares.
So with only 13 per cent of total outstanding shares, the Murdoch family will have an effective 50 per cent of the eligible votes cast (assuming only 75 per cent of eligible voting shares outside the Murdoch family vote). It is this gerrymander that has so frustrated Rupert’s critics who have been demanding 'heads roll' on the News board. As long as the gerrymander persists – and today’s actions only strengthen it – then there will be no change that doesn’t suit Rupert.
With News' $US5 billion share buyback providing price support, the market reaction to the torrent of negative news over the past 9 months has been benign to say the least. In fact, the worse the news the better the stock performance. The July 13 buyback announcement followed a 14 per cent stock price decline as revelations emerged about the hacking of the mobile phone of murdered schoolgirl Milly Dowler. Since the buyback commenced on August 16, the day of the 2011 results release, News Corp has risen 18 per cent against an Australian market rise of just 2 per cent.
In the US, the widening London scandal is barely mentioned. Most stockbroking analysts fully support News, content to 'cheerlead'. I understand their predicament. As a stockbroker I was once forcefully told that cheerleading was my true analytical purpose in life. Standing out from this crowd has been Macquarie’s Alex Pollak who, until recently, had been very concerned about the corporate governance implications of the hacking scandal. Today only CLSA’s Digby Gilmour is recommending shareholders sell.
News has dismissed the overlapping hacking allegations as confined to a rogue newspaper group. This of course supersedes earlier explanations of a rogue reporter in 2005, and a rogue newspaper (News of the World) in July 2011. The News reaction to the recent NDS hacking allegations came from the same playbook with any errant actions attributed to more rogues. The ill luck of News being plagued by rogue elements is yet to be addressed.
News is on the verge of further negative publicity. Next week both Rupert and James Murdoch are expected before the Levinson inquiry. No doubt televised live into Australia and compulsory viewing I suspect. I expect the cross examination will be a little more forensic than what we witnessed last July before the parliamentary committee.
That committee is likely to release its long-delayed report in May. Apparently there is still some internal debate about how hard hitting its findings can be in the light of possible criminal prosecutions by the Crown that may be launched against some witnesses. A damning parliamentary report opens the possibility the Murdochs and/or News Corp are not "fit and proper” to hold a broadcasting license in the UK. That would jeopardise their control of BSkyB.
Such a finding may also raise the question of whether the Murdochs and News Corp are fit and proper to broadcast anywhere. Which brings me back to today’s announcement. News didn’t suddenly have 36 per cent foreign ownership. I think News decided to remove any excuse that could possibly be used to remove their US TV licence. Foreign ownership is one excuse so they have now taken it off the table. The suddenness of today’s announcement is an indication of the concern within the company about the overlapping investigations confronting the company and its board.
Outside these pending developments there remain five UK police enquiries into the company. In the US there is an ongoing inquiry which amongst other matters is considering whether News and its board or board members systematically ignored evidence of foreign corruption such as bribing police and other public servants which may have breached the US Foreign Corrupt Practises Act. This investigation is likely to be particularly focusing the minds of News directors because penalties for breach of the act include sentences of up to five years jail.
And finally there is speculation that hacking civil cases may commence in the US if News subsidiaries were found to have hacked into celebrities' mobile phones when they were in the US.
Riding the tiger’s back
News shareholders are congratulating themselves over their strong outperformance over the last 9 months. And they are partly reassured by Rupert’s extraordinary survival instincts. After all, he survived the 1991 debt crisis! One reason why Rupert has survived an extraordinary 60 years is that he has often bought his way out of trouble. When a Charlie Ergen, or a John Malone, or assorted banks ever had him in a tight corner, he just bought his way out. He is brilliant at it.
In fact, this strategy has been repeated over the past 9 months. Rupert kept throwing 'bones' at his critics in the hope that eventually they will give up the chase. So he closed the NOTW, oversaw sequential executive resignations, then came James' departure to New York and more recently James' resignation from BSkyB’s chairmanship and so on. So far his critics remain hungry for the chase.
Anyway, buying your way out of criminal prosecutions is a whole different ball game. When criminal prosecutions commence, no amount of money or 'bones' will stop them. They only finish with acquittal or conviction. Yikes.
So News Corp shareholders should know they are riding the tiger’s back. In my opinion and experience they are likely to wake up one morning and find the News share price has experienced a sudden down draft as all the above criminal and civil litigation reach boiling point. Probably on live TV as well. But at that point there will be no sympathy for any shareholders who have ignored the gathering storm clouds. All that stands between them and that day is the ongoing buyback, in my opinion.
Mike Mangan has analysed News Corp as both a stockbroker and fund manager for over 20 years. From 1994-2004 he was consistently ranked as a Top 3 News Corp analyst.