News Corp. Bear's Den
by Chris Rugaber ([email protected])

Investors who want a wild ride with a high profile, high-spending business mogul operating in a viciously competitive industry should definitely consider News Corp. Those who want a reliable company with clear growth prospects ought to invest elsewhere.

Rupert Murdoch's News Corp. is certainly an interesting story. Huge, diversified, and far-flung, News Corp. is one of six major media companies that are currently building what amount to worldwide empires (the others being Viacom, Seagram, Disney, Time Warner, and Sony). News Corp. is actually one of the smallest of the six, and while very aggressive, simply doesn't have the management track record to inspire confidence.

News Corp. makes a lot of money, and then spends it. It paid $311 million for the Los Angeles Dodgers a year after Financial World valued the franchise at $180 million. A News Corp. subsidiary has offered $1 billion, the most ever paid for a sports franchise, for Great Britain's Manchester United football club (Britain's Office of Fair Trading is still evaluating that deal). Then there are the billions Murdoch paid for U.S. football TV rights.

As Robert La Franco wrote in Forbes, "Investors groan every time Rupert Murdoch opens a checkbook." La Franco calculates that News Corp. has spent more than $6 billion in the past 18 months for various assets. This makes Murdoch's most notorious offer of late, a rumored $3 million to Monica Lewinsky for an exclusive interview and book deal, seem paltry. Hey Rupert, why not $10 mil? She's got bills to pay.

Aside from being expensive, Murdoch's strategy of building a conglomerate that owns both content and worldwide distribution channels is not a bad one. But it's not original either, and faces a lot of competition. The whole media-information-entertainment business is a cutthroat battle of the titans, with multi-billion dollar corporations fighting each other all over the world. Many of these companies carry billions in debt and are diversified into a variety of businesses. It's not an industry for the meek.

And while Murdoch is not meek, in many ways he is playing catch-up. His recent initiatives in the United States -- the Fox News Network, Fox Sports Net, Fox Kids Network -- are simply copies of his opponents' properties: CNN, owned by Time Warner; ESPN, owned by Disney; and Nickelodeon, owned by Viacom, respectively. None of these Fox networks represent a new concept, and all face stiff competition from those who were there first.

Then there's competition from other sources, such as regional conglomerates like Venezuela's Cisneros Group, which has $2 billion to spend on a satellite TV rival to News Corp.'s Sky Latin America, which, by the way, has yet to make money after 18 months. (The company's Asian version, STAR, is still losing $100 million a year after five years).

This is loss-leading in a big way, and might be less of a concern for investors if management had better past performance. But Murdoch almost bankrupted his company in the early '90s overpaying for TV Guide, demonstrating that he can overreach. And while numbers are hard to figure for News Corp., which I'll discuss later, Hoover's puts its return on invested capital at 4.9%, low even for a media company. Net profit margins have declined in recent years, from 11.5% in 1994 to 8.9% this year; in fiscal '97 they dipped to 5.1%.

With this erratic record in mind, being bullish on News Corp. requires an investor to trust (hope?) that everything Murdoch is doing will pan out. In the emerging markets, the question dominating broadcasting is satellite vs. cable, and News Corp. has put all its money on satellites. Regarding which will end up on top, in a recent Fortunearticle, a high-level company executive said, reassuringly, "Who the hell knows?"

Aside from the inherent risk of News Corp. being wrong, its preference for satellites reveals a lack of interest in cable's interactive potential. Wired's website summarized the company's strategy with this headline: "Murdoch Banking on Couch Potatoes, Not Webheads." The company plans to provide only limited interactivity through TV set-top boxes and so forth. Is that the only way most people around the world will end up accessing the Internet? Maybe, but the experience of ventures like WebTV provides little reason to think so.

On top of all these big-money bets is the difficulty an investor has in keeping track of the company. Incorporated in Australia, News Corp. doesn't have to file 10-Ks or 10-Qs with the SEC. Using Generally Accepted Accounting Principles (GAAP), the company apparently lost money in fiscal 1997, but its own financial statements claim $561 million in profits that year. Perhaps this disparity is a result of News Corp.'s tax shenanigans, which include claiming losses on U.S.-based businesses and gains on businesses incorporated in various Caribbean tax havens. Either way,given the multiple exchange rates it deals with, the various degrees of ownership that News Corp. has in other companies, and its many different one-time purchases, good luck trying to figure out what the right numbers are.

Partly for this reason, News Corp. has always traded below what Murdoch and others think the company is worth. As a result, later this month News Corp.'s growth-oriented holdings -- its American TV properties, movie studio, and sports teams -- will be rolled into the Fox Entertainment Group, 13.4% of which will then be sold to the public. (Originally 20% was to be sold, but that was scaled back in the face of a tough Initial Public Offering market). This is not a bad idea, either, but it may just highlight how uninspiring everything else owned by News Corp. actually is.

Next: The Bull Responds