Murdoch and Malone Near a Deal
News Corp. (NWS) Chairman Rupert Murdoch and Liberty Media (LINTA) Chairman John Malone are close to resolving a personal dispute that will have repercussions well beyond the two billionaire media moguls.
Murdoch told investors on Nov. 14 that he is nearing a deal to buy back Malone’s stake in News Corp., which is nearly large enough to threaten Murdoch’s control over his empire. Murdoch didn’t elaborate on details, but it is understood to be a tax-free swap. Malone is expected to trade his 19% voting stake in News Corp. for News Corp.’s 38% stake in DirecTV. Malone’s stake of voting shares in News Corp. is large enough to rival Murdoch’s own 30% interest [see BusinessWeek.com, 9/18/06, "Murdoch to Bid Satellite Goodbye"].
Murdoch also will inject some cash or additional assets into the deal to balance the equation. News Corp. has a market capitalization of $84.5 billion, which means that a 19% stake is worth about $16 billion. DirecTV has a market cap of $26.4 billion, which means a 38% stake would be worth $7.4 billion.
Absolute Control The deal pits two of the sharpest minds in the media business against one another. Malone, a savvy financial strategist who sold his TCI cable TV business to AT&T (T) at the top of the market, is one of the few people to ever put real pressure Murdoch. “This has to hurt Murdoch,” said Howard Jonas, billionaire chairman of telecom upstart IDT. Jonas, who sold his entertainment business to Liberty, is close to both Malone and Murdoch. “They like and respect one another a great deal, but business is business,” Jonas said.
It’s not that Murdoch is losing. Murdoch will emerge from the deal with absolute control over his empire. On Nov. 14, he narrowly won a shareholder vote in Australia that approved creation of a “poison pill” anti-takeover defense. That’s personally important to Murdoch, who has kept control of News Corp. within his family, even as it has grown from a newspaper business in Australia into a global media empire.
By swapping his DirecTV stake, Murdoch will be leaving a satellite business loaded with risk and creating more room for growth on the Web. DirecTV is certainly a profitable company. But over the next few years, it will face increasing pressure from the cable TV industry and the telecom industry. Satellite players already lag cable and phone companies in the market for high-speed Internet access. That huge gap is about to get even wider. Cable and TV companies are going to upgrade their networks so that consumers can download movies and other big files faster than ever. And the next upgrade will make it easier for consumers to send big video files as well. That will be extremely important as sharing homemade videos online takes off.
The Wi-Max Factor Leaving the U.S. satellite business will give Murdoch, whose 2005 acquisition of social-networking site MySpace is viewed as a major success, more time and resources to invest in the Internet [see BusinessWeek.com, 6/5/06, "Murdoch's Tech Offensive"]. On the downside, he won’t have a distribution platform in the huge U.S. market. He is, however, retaining his satellite TV systems in Britain and Italy, where they dominate markets that have little cable TV penetration.
Given the challenges facing satellite in the U.S, it’s fair to ask why Malone has pursued control of DirecTV so persistently [see BusinessWeek.com, 9/22/06, "Why Malone Desires DirecTV"]. Liberty didn’t respond to a request for comment. But Jonas said that there were three reasons why Liberty could make a success of DirecTV. “Liberty already is the largest operator of cable systems outside the U.S. By getting control of DirecTV, he would become the only truly global distributor of media,” Jonas said. That would give him a unique role in an increasingly global media market.
Satellite could conceivably overcome its disadvantage in broadband by investing in the high-speed data technology known as Wi-Max. The technology is just about to hit the market, and it isn’t known whether it will be able to deliver on its promises. “But if everything that Intel (INTC) says about Wi-Max is true,” it could be a low-cost broadband and wireless phone infrastructure for the satellite TV business, Jonas said.
DirecTV also could be used to enhance the value of Malone’s TV networks, which include Starz and Encore. Boosting their visibility on satellite could help them compete with rivals such as Time Warner’s HBO (TWX).
The showdown between Murdoch and Malone has been as subtle as a game of chess. But in this match, the winner won’t be apparent until well after the final piece has been moved.