The Murdoch discount

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Good morning. David Solomon, Goldman Sachs’s CEO, has given up DJing gigs. “The media attention became a distraction,” according to a Goldman spokesperson. If you think this is a buy signal, email me:

Starboard vs News Corp

Wall Street has an undeserved reputation for cynicism. It is, in fact, a field on which hope frequently goes to battle against experience. The latest example: activist fund Starboard Value has bought a stake in News Corp, and thinks it can make the Murdoch family do what it wants. Here is the WSJ, yesterday:

Starboard believes News Corp . . . trades at a significant discount to its fair market value due to its conglomerate structure . . . Starboard plans to recommend News Corp spin off its digital real estate division, which includes a stake in Australian online property site operator REA Group and parent Move Inc

The activist . . . also plans to push News Corp to collapse its dual-class share structure, which gives the Murdochs voting power in excess of their economic ownership

Starboard is trying to do two quite different things here. One very much possible, if not obviously practicable: catalysing a standard piece of demerger arbitrage. The other may be near impossible: eliminating the Murdoch discount.

News Corp’s history shows that it can be convinced to sell or spin off key assets, so long as there is money to be made by doing so. The very creation of the modern News Corp, in 2013, was largely an effort to eliminate a conglomerate discount by splitting the old News Corp into high-growth film and television (which became 21st Century Fox) and low-growth print legacy media.

Furthermore, while the Murdochs may be empire builders, they are not accumulators. They like selling things when there is money to be made by doing so. This is what they did in 2018, selling 21st Century Fox’s entertainment assets to Disney and its Sky European pay-TV business to Comcast, both for what are generally agreed to be very good prices. As if to prove their enthusiasm for reorganisation, the Murdochs have since considered putting News Corp back together with Fox Corporation, the US television broadcaster left behind by the 21st Century Fox sale (they dropped the idea in the end).

The Murdochs have also floated the idea of selling Move Inc already, to rival CoStar, reportedly for $3bn or so (Move is not the entirety of News’ digital real estate business. REA Group is a separate Australian digital real estate advertising business. Together, the two generate about a third of News’ ebitda.) That deal was scrapped earlier this year, but the company said it would “continue to actively assess opportunities to support the company’s strategy to optimise the value of its digital real estate services segment”.

Is Starboard pushing on an open door, then? Part of the problem with News Corp’s effort to sell Move may have been the price. The stock prices of rival US real estate sites Zillow and Redfin are both well below pre-pandemic levels, and real estate markets have been frozen by interest rate increases. A spin-off, in which News Corp retains some ownership, partly solves that problem by letting the parent company retain some upside if the market improves. Still, it would be an awkward moment to launch News’s digital real estate businesses on public markets.

The valuation of the spin-off might be less important, however, than the re-rating of News Corp itself, if reducing the complexity and changing the ownership structure of the business together lead to expansion of its valuation multiple. So, how big a discount does News Corp trade at?

One imperfect but useful comparison is with the New York Times, which is mostly a pure-play newspaper business, without News Corp’s exposure to real estate advertising, Australian pay-TV and book publishing exposures. Indeed, newspapers only account for a bit more than half of News’s profits. Nonetheless, the comparison is informative. Given some differences in the capital structure of the two companies (News Corp has more debt, for starters), the cleanest metric for comparison is probably enterprise value (debt + market capitalisation) divided by earnings before interest, taxes, depreciation and amortisation. Measured this way, News Corp has been trading at a discount of more than 50 per cent to its rival for several years:

Line chart of Enterprise value/Ebitda showing Liberal media bias

It is not terribly difficult to imagine Rupert and Lachlan Murdoch looking at that chart, feeling grouchy, and wondering what to do about it. Alan Gould, an analyst at Loop Capital, reckons News’ EV/ebitda valuation looks even cheaper once the real estate business is excluded; he raised his price target on the Starboard news.

But not all of the discount is because of News’s conglomerate structure. Some part of it is down to the fact the Murdochs have a nearly 40 per cent voting stake in the company, enough to give them effective control. Companies in which minority economic stakeholders enjoy controlling voting tend to trade at a discount (unless the business is performing fantastically well, in which case investors forget the undemocratic control structure until performance falters). News Corp’s valuation bears an additional burden — what a colleague of mine calls the “buccaneering” aspect of Murdoch ownership. There is a sense that anything goes Murdoch companies in terms of capital allocation (buying the Wall Street Journal at a huge premium, say) or ethics (as evidenced by the phone hacking scandal and voting machine lawsuits).

The so-called “Murdoch discount” has persisted for a long time. The oldest reference I can find on dates to 2005, but it almost surely goes back further than that. It will continue to persist so long as the voting structure does and Rupert Murdoch is alive, whatever his nominal role in the company is, and it may well outlive him.

Could Rupert and News chair Lachlan be convinced to drop the lopsided voting structure, if they believed there was financial upside in it? Perhaps, but I doubt it, not because of any insight into family psychology, but because people in general don’t like giving up control over things. Perhaps readers can remember a case where a family with special voting class shares gave them up without being forced by circumstance. I cannot.

Exactly how much of News Corp’s discount is attributable to its conglomerate structure and how much is down to its ownership structure is hard to say. My guess is a lot of it comes down to ownership, and will be hard for Starboard to dislodge.

Citi’s symbolic sandwich sacking suit

This story was, gloriously, the most read on for most of yesterday:

Citibank has won an employment lawsuit against a banker who was dismissed for submitting an expenses claim that included coffee and sandwiches for his partner and lying about it.

Szabolcs Fekete, a senior analyst, sued the bank alleging unfair and wrongful dismissal after he was ousted over the expenses he submitted after a three-day work trip to Amsterdam in 2022 . . . 

Fekete, an employee of seven years’ standing, submitted a small expenses claim that included snacks for his life partner. A manager challenged the expense; Fekete insisted the snacks were all for him. More questions ensued. “I don’t think I have to justify my eating habits to this extent,” Fakete said. The manager sent the matter upstairs to the ethics office. Fekete ultimately cracked, admitting that some of the snacks were eaten by his partner. The bank fired him for lying. The judge then found the bank was within its rights to do so, bringing the whole pathetic incident to what can only hope is an end.

I have three responses to this story:

  • Everyone should cheat on their expenses just a little. Goodness knows the sadistically complex expenses systems most of us are forced to use extract their pound of flesh in return. Power to the people.

  • That said, do not lie to your company, ever, even about trivial things. Fess up and move on. This is all the more true if you work for a bank. Banks are in the trust business.

  • Some actual human being should have intervened in this dystopian corporate farce before it got out of hand. Management, most of the time, is nothing more or less than the ability to prevent idiotic things from happening. If you find yourself elevating a dispute about a sandwich to the ethics department, consider a different career.

These responses are contradictory but I remain committed to all three. What is worse, part of me wants to turn this story into a metaphor for what has gone wrong with banking. Since the banks’ utter inability to understand their own risk-taking nearly crashed the world economy in 2008, society’s basic response has been to pile lots and lots of highly specific rules on to the industry (it is hard to read Mr Fakete’s own job title, for example, without an existential shudder: “senior analyst, Emea regulatory exam management and oversight”). But we all know that in the absence of judgment, experience, and political will, rules degenerate into waste, box-checking, and absurdity.

Is Mr Fakete’s case a preposterous echo of the 2008 crisis? Is it emblematic of why Citi is up to its neck in regulatory matters and struggling to cut its payroll — and is not alone in either respect? A bit of a stretch, but worth thinking about.

One good read

Against CNBC.

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