How Plan Will Impact Fox

Apr 12, 2004  •  Post A Comment

As Rupert Murdoch’s News Corp. sets about the process of reincorporating in the United States, attention among some on Wall Street has shifted to what might be next for Fox Entertainment Group, which is 82 percent owned by News Corp. and holds many of News Corp.’s U.S. entertainment interests.
While Mr. Murdoch has indicated that Australian-based News Corp.’s ownership in FEG isn’t likely to change with the reincorporation, some analysts think otherwise.
One reason is that the main factor that prompted the creation of the separately traded FEG in 1996 would be moot under the reincorporation. FEG was spun off as a way to attract U.S. investment at a time when many investors criticized News Corp.’s international assets as confusing to understand. By creating a stock for the U.S. assets, News Corp. was able to attract U.S. investors and use FEG stock, which traded at a premium to News Corp.’s American depository shares, to finance acquisitions.
But that reason goes away if News Corp. is a U.S.-based company, analysts said. Though many U.S. investors have shied away from making significant, if any, investment in an Australian-based News Corp., analysts expect a U.S.-based News Corp. to have broad investor appeal, which would likely trigger a rally in the shares traded on the New York Stock Exchange.
Douglas Shapiro, an analyst at Banc of America Securities, predicts the trade gap between News Corp. shares and FEG shares will narrow considerably once News Corp.’s domicile changes to the United States because it “theoretically eliminates the reasons Fox exists as an independent entity, namely to offer U.S. investors a way to play News Corp.’s U.S. assets and provide a way to access the U.S. capital markets.”
Added Richard Greenfield, an analyst at Fulcrum Global Partners, in a research note: “Fox has essentially outlived its usefulness to News Corp.”
In terms of timing, Mr. Greenfield expects News Corp. to move toward folding FEG into the News Corp. empire in the next 12 to 24 months, once the shares in the U.S.-based News Corp. trade at a multiple equal to or exceeding FEG’s valuation, which ensures the transaction would be neutral to accretive to the parent’s valuation.
News Corp. officials said they expect to complete the reincorporation by the end of the year, pending shareholder and legal approval. While details have yet to be worked out, the company said it expects to exchange existing voting and nonvoting shares in the Australian-based company for voting and nonvoting shares in a new U.S.-based company on a one-for-one basis. Mr. Murdoch and his family would continue to own about 29 percent of the company.
The company said two of the main reasons behind its decision to reincorporate are to simplify its ability to access U.S. capital markets and to broaden its investor base, which has been limited as many U.S. investors avoid foreign-based companies either because of investment rules or because of investor hesitation at buying into companies not found on major U.S. indexes.