Analysts differ on Dow Jones takeover bid

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NEW YORK -- Wall Street analysts on Tuesday had differing initial views on News Corp.'s $5 billion takeover bid for Dow Jones.

While most believe the takeover play has a good chance of being successful, at least one Street observer said it may raise concerns among News Corp. investors about the company's strategic focus and capital allocation.

The Benchmark Co. analyst Edward Atorino, who covers newspaper stocks, was bullish on the strategic benefits of the proposed deal for News Corp. and its financial benefits for shareholders.

He said it is hard to predict if the Dow Jones board would accept the takeover proposal, but added: "This is such a credible offer. The trustees can't dismiss this out of hand. It's cash, it's News Corp. If they say no, they better have some pretty good reasons."

He also said that News Corp.'s bid represents "a huge premium."

Prudential Equity Group analyst Steven Barlow echoed that sentiment, saying in a report: "We believe the family will sell to News Corp.," controlled by chairman and CEO Rupert Murdoch.

The Bancroft family controls about 65% of the voting shares in Dow Jones, and he said the family in a regulatory filing in October adopted a plan, under which its trust would sell up to 10,000 shares per day through June for prices as low as $30. "If one is willing to sell for $30, $60 is a windfall," Barlow said.

Atorino also argued that the Fox Business Channel, which is still in development, would benefit from having the Dow Jones assets under the News Corp. umbrella.

"Buying Dow Jones gives them instant credibility and puts them in business," he said, pointing out the experience and brand recognition of Dow Jones and its products.

While Dow Jones' current partnership with CNBC may still cover several more years, Barlow and Atorino suggested that there may be ways out of it for News Corp.

"Dow Jones does have an agreement with CNBC, but it only takes money to extract themselves from it," Barlow said.

"I don't think that's a big deal," Atorino echoed. "Murdoch can find a few lawyers to figure that out."

Meanwhile, Bear Stearns analyst Spencer Wang, who covers News Corp., said investors may be spooked by the proposed transaction as it raises questions about the conglomerate's strategy and capital allocation.

As a result, "investors could put News Corp. in the penalty box," meaning the stock could remain under pressure for some time, he warned.

In a research note to investors, Wang cited several reasons for concern. "Such a deal would increase News Corp's exposure to slower growth print assets facing secular challenges" and would be modestly dilutive to its long-term revenue and earnings before interest and tax growth, he wrote. He also estimated that News Corp.'s calendar year 2007 earnings per share growth could be dragged down by 1%-3% by the deal.

Finally, the analyst argued that a Dow Jones acquisition could slow News Corp.'s aggressive stock buybacks, "which we believe investors would view negatively."

In addition, Wang warned that the proposed transaction "reinforces our view that increased M&A activity and the impact to return on invested capital is a risk factor for entertainment stocks."

However, Barlow suggested that News Corp. could raise some new cash by divesting the Ottaway community newspaper group that is part of Dow Jones. He also suggested that a bidding showdown is unlikely given a likely lack of rival suitors.

Deutsche Bank Securities analyst Paul Ginocchio in a report Tuesday put a 75% likelihood on News Corp.'s takeover offer being accepted. He raised his target price on Dow Jones from $42 to $55 but lowered his rating from "buy" to "hold" given Tuesday's jump in the stock.
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