MURDOCH STILL “OPTIMISTIC” OVER MISSION CRITICAL DIRECTV BID
by Chris Forrester
With News Corp. suffering a share price slide of around 40 per cent in the last two months, it seems Rupert Murdoch’s aim of adding DirecTV to his ‘Sky Global’ portfolio is looking increasingly challenging. A week ago News Corp’s president and COO Peter Chernin admitted at a New York conference that the events of September 11 had caused an already weak ad market to slump still further and described the outlook as “pretty lousy”. He also said that that the cost of the attacks in terms of lost ad revenue and increased news expenditure was around $100 million (E108.7 million), with further cancellations likely as advertisers wiggled out of pre-booked commitments.
Rupert Murdoch later said the slowdown has affected all three of News Corp.’s key markets (US, UK and Australia), adding that its income – which had been expected to grow by 20- 26 per cent to June 30, 2002 – is now likely to rise by only around 10 per cent. With the future looking uncertain, he is expected to amplify his strategy before News Corp.’s shareholders on October 11.
Meanwhile on the DirecTV acquisition front, Chernin said News Corp. remained “optimistic” about ongoing negotiations with Hughes Electronics. While adding that Hughes’ ability to retain and add new subscribers, as well as keeping costs low, could add $1 billion (E1.08 billion) in profit to the DBS outfit, he refused any time frame for closure of the negotiations. One report last week stated Rupert Murdoch had cut the cash component of News Corp.’s offer by up to $1 billion to $4.5 billion, and in the process possibly created a more level playing field for Charlie Ergen’s Denver-based EchoStar.
Murdoch has also already issued tough belt-tightening guidelines to his regional managers around the globe, stating that there are tough times ahead and that only “mission critical” spending would be approved.
However, if News Corp’s stock price has fallen, then so too have both DirecTV’s and Echostar’s. Indeed, one analyst’s report talks of US DBS stocks now representing “compelling buying opportunities”. Investment bankers Salomon Smith Barney have already raised Echostar to an ‘outperform’ rating – not surprising when the broadcast platform is trading at about $2,100 per subscriber compared to cable’s average of $3,800. Yet even this is cheap at the price, especially given that forecasts state Echostar will achieve 100 per cent EBITDA growth in 2002, followed by 68 per cent in 2003. Cable, in comparison, only promises a relatively sluggish 14 per cent EBITDA upswing each year.
There are other benefits for an incoming Echostar or DirecTV investor, with a fall-off in new subscribers, which is expected by some analysts, likely to see both DBS broadcasters benefiting from significantly lower Subscriber Acquisition Costs (SACs).
Echostar’s offer for DirecTV was roughly translated at the time to $22.83 a share, worth $22.6 billion and representing an 18 per cent premium to DirecTV’s stock price. Although both stocks have since fallen, the premium for DirecTV (GMH) has grown and perhaps bolstered Echostar’s case. Indeed, the offer would now represent roughly $16/GMH per share, a 30 per cent premium on the current GMH stock price. Speaking last week, one analyst said any delay in Rupert Murdoch closing on his DirecTV bid represented good news for EchoStar.
And yet Murdoch may face other challenges with his DirecTV bid. As his News Corp. stock price has tumbled, so the friendly cash elements understood to be on the table from John Malone and Bill Gates achieve a potentially greater value in the total mix, unless matched by Murdoch in some form or other.
At a Merrill Lynch-organised conference back in June News Corp.’s strategy was clear, with presentations including impressive overviews of Murdoch’s international assets “reaching two-thirds of the world’s population”. While that reach includes his network of Fox-branded stations across the US, key to expansion growth were his – as yet unprofitable – investments in Star TV and China. Star’s potential is clearly immense, with the service already claiming some 300 million prospective viewers in 53 countries “and the Number 1 media brand in Asia”. China meanwhile receives a clutch of News Corp.-backed channels (Phoenix, Phoenix Gold, Phoenix InfoNews, Star Chinese, Star Mandarin, Star Sports) and Chinese-tailored services (including from ESPN, Nat-Geo and Channel [V]) in addition to Star TV. Moreover, Phoenix is China’s third most-watched channel after CCTV1 and 2, and according to AC Nielson’s Peoplemeters News Corp. has three other services in the ‘Chinese Top 20’ channels.
Meanwhile in India, cable and satellite-related ad spend is forecast to grow from $432 million this year to $1.02 billion in 2004. In South America, where Sky Latin America has over 1.3 million subscribers, a merger with DirecTV would lead to savings all round, although Mexico’s broadcasting regulator recently said they would object to any merger.
While Murdoch is famous for always having a ‘Plan B’ up his sleeve, the difficulty is knowing how that plan might unfold as part of his ‘mission critical’ roll out towards a global platform.