Is it all over for the Murdoch Empire?
http://media.guardian.co.uk/rupertmurdoch/story/0,11136,606116,00.html
So who is Rupert Murdoch's heir now? And will the uncertainty destroy his
empire? Neil Chenoweth on a clan in crisis
Neil Chenoweth
Monday November 26, 2001
The Guardian
Murdoch family members across the globe show every sign of being delighted
with the arrival in New York of Grace Helen
Murdoch, the pride and joy of her proud parents, Rupert and Wendi. The
family is "overjoyed" about the birth, said Lachlan
Murdoch, heir apparent to the News Corp throne. But for News Corp
shareholders a Murdoch heir is not such an
uncomplicated affair. Investors need to know that the birth has changed
nothing. They ask: is the £4bn News Corp succession
safe?
The flurry of attention over last week's birth obscured the more urgent
question: what is Murdoch hatching now in Europe, after
his humiliating defeat in the US, in the failed negotiations with General
Motors to buy DirecTV and its holding company Hughes
Electronics?
And yet the two issues - the succession, and what Murdoch does next with the
empire - are not so far apart. They are linked
by the Machiavellian figure of Murdoch's old friend and rival, John Malone
of US cable giant Liberty Media.
The cost of Murdoch's latest US setback is still being measured. In North
America, it is already triggering a worrying new wave
of media consolidation. Britain's TV and newspaper groups were already in
play, but now the bidding is real. There is a
question mark over the ownership structure of BSkyB. The pay-TV industries
in Germany, Italy and Latin America are in
turmoil. And after next week the Murdoch family will no longer be the
largest shareholder in News Corporation.
That all these effects flow from one failed deal underlines the enormous
juggling act that Murdoch's bid for Hughes required
after satellite operator Echostar stepped in and snatched DirecTV from under
Murdoch's nose. Today that bid looks like
Humpty Dumpty. Even if GM's deal with Echostar is blocked on anti-trust
grounds next year, it's hard to see Murdoch being
able to put all the pieces of his bid back together.
It's not the first time that a Murdoch defeat has had wider repercussions
than his victories. This is particularly so today, as the
effects of the crash in technology shares changes the balance of power
between media content companies and distribution
networks. This struggle in Britain is echoed around the world. Blair's
government did its bit for the cause with a public signal
last week that its review of cross-media legislation would make life less
onerous for hard-working US moguls. The looming
shake-up in Britain's media industry is throwing up some curious bedfellows.
But what Murdoch does in Britain and Europe depends upon his machinations
with Malone, which are inevitably wrapped up
with the Murdoch succession issue. Which brings us back to Grace.
Rarely has the arrival of a new media heir provoked such apparent dismay in
a dynasty. The public glimpses that have
emerged - Murdoch's ex-wife Anna giving an angry interview about the
divorce, Matthew Freud slating his future father-in-law in
Vanity Fair - are a pointer to the personal turmoil that has shaken the
Murdoch family over this birth. These intra-Murdoch
exchanges are something more than tabloid fodder. How this family resolves
its differences has wide-reaching implications
around the world.
In effect the future of the global media empire has been determined by a
piece of paper which Rupert Murdoch and Anna
signed when they divorced on June 8 1999. It's an agreement which was drawn
up to assure Anna that the four existing
Murdoch children - Prudence McLeod, Elisabeth Freud and Lachlan and James
Murdoch - would inherit control of the AE
Harris trust, and Cruden Investments Limited, through which the family
company controls News Corp.
A week later, the four children began appointing their own representatives
to the boards of the Murdoch family companies. This
was completed by June 26. Murdoch married Wendi Deng on June 29. Through the
Cruden group, the Murdochs own more
than 16% of total News Corp stock, worth £4bn. In March 1999, 10 weeks
before the divorce, Murdoch had completed buying
his sisters' families out of Cruden. These holdings and Murdoch's existing
shares, which together comprise 90% of Cruden's
shares, are held in trusts. The four children will be equal beneficiaries of
those trusts. They hold four of the eight board seats
on Cruden, with News Corp executives and lawyers making up the rest.
There is another 10% block of Cruden, owned by his mother Dame Elisabeth,
which will pass to Rupert on her death - and on
to any new heirs. It's believed that this 10% holding, currently worth
£400m, will ultimately pass to Grace and any siblings,
though she will not come into her inheritance until 2031, when she turns 30.
Until that time, after her father's death the
inheritance will be controlled by trustees. The key to the Murdoch trusts is
who has the power to appoint trustees. While the
trust structures are so labyrinthine that it is difficult to be sure,
presumably that power would be held by her guardian. That
would be Wendi.
Of course, the shares can't be sold, and any decision to pay dividends on
that shareholding would be decided by the older
children. What happens if they fall out is uncharted territory. The position
now is that, while Murdoch controls a £4bn fortune,
any major money decisions have to involve his children. This was the reason
for the Wendi options.
After a lifetime of not taking stock issues, at the height of the tech boom
18 months ago Murdoch received 24m options of
News preference stock valued in the accounts at $US35m. These options would
have provided financial security for his new
family. But with the News share price today well below the $A22 stock price,
they are worthless.
With a burgeoning new family to consider, the wide reach of Anna's
succession settlement produces its own pressures. Which
begs the questions: just how watertight was that agreement? And what exactly
will Murdoch's heirs inherit?
News Corporation is a peculiar animal. Most of it is American, and it is
much larger on the inside than it looks from the
outside. Its shares are worth £24bn. It ranks as only the fifth largest
media group, behind AOL Time Warner, Viacom, Disney
and Vivendi. But News Corp's strength is the distribution systems it
controls with minority stakes - companies such as
BSkyB. If you count in the full value of these companies, Murdoch controls
an empire worth more than £45bn. That makes it
the second largest media group in the world, just in front of Viacom.
The News share register is like a black box. Some 60% of its equity is
non-voting preference stock, with no reporting
requirements for major shareholders. Nobody knows who owns the shares in
nominee companies. Half the stock is traded in
the US as American Depositary Receipts, which are held as a block by the
trustee, so again, only Murdoch knows who owns
them.
There are three problems with this structure. First, it's a perfect stock
for outsiders to ramp. Second, any big media group who
bought a 20% stake in News Corp's voting stock (the maximum number a buyer
can acquire before making a takeover bid)
would pretty much have Murdoch on toast.
The stake would cost £2bn. Murdoch would stay in control with his 29% of the
voting stock, but his position would be
precarious enough that the new investor could probably demand he run any
programming they wanted on this £45bn global
distribution network. (Bear in mind that Michael Eisner at Disney has just
paid $US5.2bn for Fox Family, to be able to run
Disney programming on just one cable channel.)
Third, the opaque share register hides Murdoch's weakening hold on News. He
owns only 16.2% of the total stock. The
numbers suggest that in 10 years' time, the Murdochs will no longer control
News. This is why John Malone now looms so
large on Murdoch's horizon.
On November 13, Malone disclosed that assets that were supposed to go into
the Hughes deal after November 27 will now be
sold into News. With the extra shares he will receive, Malone will hold 18%
of News. This is all non-voting stock, as Murdoch
continually stresses. But it represents too much money, and Malone is much
too clever to allow any Murdoch succession
without his approval.
Malone built Tele-Communications Inc into the largest cable group in North
America, before selling it to AT&T for $US56bn.
Now in Europe, in South America and Australia he is cobbling together one of
the largest cable networks outside of the US,
with a Murdoch-like disregard for losses.
When Murdoch finally realised, on the evening of October 27, that he had
lost the battle for Hughes, he immediately called
Malone. "So what's next then?" Malone asked. Blocked in their US ambitions,
these two exiles turned their eyes towards
Europe. In Germany, they are currently tormenting Kirch with a good cop-bad
cop routine over BSkyB's 24% stake in the
Premiere pay-TV platform. In Britain, Malone looks to be using his 25% stake
in the Telewest cable group to shape what
seems an inevitable merger with NTL.
Murdoch's preferred option with ITV Digital can be summarised under mercy
killing. His fallback position, Media Diversity By
Slow Asphyxiation, is currently being finalised with the agreement for BSkyB
to carry ITV.
The government's determination to phase out analogue dramatically changes
the balance of power away from content producer
ssuch as the BBC towards the distribution networks like BSkyB which will
carry them. Murdoch is capitalising on this shift by
pressing for a direct television investment, even giving signals that he
might be prepared to offload some of his newspaper
interests as a strategic concession.
The biggest imponderable is what happens to BSkyB. More particularly, to the
22% shareholding that Jean-Marie Messier at
Vivendi needs to sell. In a very short period in April, Messier was talking
to Malone about exchanging his BSkyB shares for a
20% holding in USA Networks; Murdoch agreed with Messier to merge his Stream
SpA with Vivendi's Telepiu, to end their
expensive pay-TV war in Italy; and Murdoch and Malone's discussions with
General Motors got back on track.
Floating out there in the ether was the hazy outlines of a deal, or perhaps
just an expectation: Messier would get Italy, while
his BSkyB stake would end up via Malone in Murdoch's Sky Global-DirecTV
merger.
For tax reasons, any such deal could not be done until two years after
Murdoch settled with General Motors. And as it
happened, Messier decided to put the stake on ice for a couple of years in a
bank trust.
Was there a deal? We'll never know. But Murdoch's first move after the
Hughes knockback, with the Stream-Telepiu deal under
fire from regulators in Rome, was to talk about reviving hostilities in
Italy. BSkyB remains the cornerstone of Murdoch's global
satellite ambitions. And Messier's stake is the key to BSkyB.
Which brings Murdoch back to Malone.
Grace was conceived within a week or two of Murdoch turning 70, an event
which he celebrated by calculating how many hours
of working life he had left in him. What can the Murdochs say about this
birthday baby and her young mother... except
congratulations.
· Neil Chenoweth is the author of Virtual Murdoch (Secker & Warburg, £18.99)
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