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

Oh no! I've been cast as the bad guy in a surreal X-Files finance episode! Maybe I should start smoking -- oh wait, the "Cigarette-Smoking Man" is already a character. I suppose I could be the "Gum-Chewing Guy," or something like that.

OK, sorry, I was just trying to play along.

Anyway, Fox Mulder, a.k.a. TMF Puck, seems to be arguing that News Corp. owns a lot of stuff, and therefore it's a good stock. But that's really not enough for investors to buy it. While it's true that the stock is generally considered undervalued given its properties, there are also perfectly good reasons for this.

First would be the apparent low return on invested capital that I mentioned earlier. Second, the difficulty in really calculating all those numbers is a problem in and of itself, given the company's convoluted finances. Third, earnings per share were $0.94 in 1993, $1.84 in 1995, $0.49 in 1996, and $1.12 in 1997. Even Fox Mulder couldn't find a pattern there. Such erratic returns do not help the company's valuation.

Then there are other factors, such as News Corp.'s $8.5 billion in long-term debt. While it is in much better shape on this score than it was a few years ago, the fact is that News Corp.'s share of the profits from the movie Titanic, for example, won't even cover the company's net debt service for 1998 (which was approximately $522 million).

But the real problem is that there's no end in sight to Murdoch's spending. The purchase of Manchester United, despite its huge price tag of $1 billion, may actually pay off. After all, his overpaying for TV Guide and his hugely expensive football TV contracts have. But once one overpriced purchase shows returns, then Murdoch's on to the next. Soon we'll read that News Corp. is offering $10 billion for the Dallas Cowboys, or some other such outlandish offer. Maybe one day News Corp. will pull back from its acquisition spree, but given that it's still one of the smaller of the six media giants I mentioned earlier, one can easily see billions being spent far into the future.

This seems even more likely given the competitive arena News Corp. is in. Sports teams may be a great source of revenue, both from ticket sales and TV rights, but Murdoch is hardly the only one to figure this out. News Corp. may own the Dodgers and stakes in other teams, but Time Warner owns the Atlanta Braves and Hawks, Walt Disney owns the Anaheim Angels, and even the Tribune Company owns the Chicago Cubs. And they paid a lot less for them.

Another thing about sports is that there's a lot of it to spread around. While Fox has some rights to football broadcasts, CBS anted up $4 billion for rights to broadcast NFL games this year, and ABC also paid a huge amount for a football contract. Early results from this fall season indicate that CBS has clearly benefited from its football broadcasts, and is recovering from its recent years in the doldrums.

Not only are sports competitive, but so is TV generally. The X-Files may be a popular show, but Fox's newest offerings -- Costello and That '70s Show -- aren't making any other networks sweat. In fact, during the first week of this fall season, CBS was the clear ratings winner, averaging 14.8 million viewers, to Fox's 8.6 million, and CBS even beat Fox in the advertiser's preferred under-50 demographic. Signs are that Fox is suffering from the same kind of competition from the multitude of cable channels that all broadcast networks are. Compared to last year's premiere week, CBS lost 3% of its viewers, while NBC lost a whopping 15%, and Fox lost 6%. Do investors really want their funds relying on the vicissitudes of TV sitcoms?

The sale of stock in Fox Entertainment Group may end up helping News Corp., but clearing up the organization of the company doesn't change the underlying dynamic: That News Corp. pays huge amounts for some properties, loses lots of money on others, is in a tough business, and doesn't have a reliable track record of returning value to shareholders. Individual investors should be wary of companies that are as convoluted and unpredictable as an upcoming X-Files episode.

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