Wall Street likes networking idea

But chances of MySpace-for-Yahoo-stake deal are 'low'

Wall Street observers said Wednesday that a potential deal by Rupert Murdoch's News Corp. that would involve a swap of its social networking juggernaut MySpace for a sizable minority stake in Yahoo Inc. would benefit both sides but could prove difficult to pull off.

Reports in the Times of London, part of News Corp., and on CNBC.com suggested that the media giant has been looking at such a transaction and would want to get a 25% stake in Yahoo for MySpace.

A News Corp. spokesman declined comment Wednesday. A Yahoo spokeswoman said, "We don't discuss rumors."

However, industry observers quickly pointed out that it would be a classic Murdoch move to buy an asset like MySpace on the cheap before it is on most people's radar only to later use its increased value to get a stake in a larger business with growth potential.

"News Corp. is always adjusting its portfolio of businesses to take advantage of new opportunities and mix fast-growth with stable but more mature businesses," one Wall Street source said.

News Corp. also is trying to win support for a takeover of Wall Street Journal owner Dow Jones.

The analysis of the potential Yahoo-News Corp. deal came on a day that also saw MySpace founder Brad Greenspan, who has been trying to get back at News Corp., announce that he and a group of investors are looking at buying a minority stake of about 25% in Dow Jones for the same $60 per share offered by Murdoch.

In other news, Dow Jones said its board and representatives of the Bancroft family that controls the firm have agreed "that the best way to continue to evaluate the News Corp. proposal to acquire the company would be for the board of directors to take the lead in addressing all aspects of the proposal and all other strategic alternatives, including remaining independent."

In a research report Wednesday, Citigroup analysts Jason Bazinet and Mark Mahaney argued that a Yahoo-MySpace tie-up would be "positive, but valuation questions remain."

If News Corp. got a 25% stake in a merged Yahoo-MySpace, this would imply a $12 billion valuation for MySpace, or a multiple of more than 55 times estimated 2008 earnings before interest and tax, the analysts said, adding that a "more reasonable valuation is closer to 30 times 2008 EBIT."

This in turn would mean that News Corp. would have to settle for a 15% stake in a merged entity, which might be too low for it.

Analysts have long argued that the value of MySpace, which News Corp. bought for $580 million, has expanded significantly, with some predicting it could reach $20 billion or more in a few years.

Nonetheless, "given the potential wide variance in MySpace value between two parties, we think the chances of a (Yahoo-News Corp.) transaction are low," Bazinet and Mahaney concluded in their report.

One Wall Street observer suggested, however, that the gap could be narrowed somewhat if News Corp. threw in all assets in its Fox Interactive Media unit.

If price issues can be overcome, what would the strategic benefits of such a deal be?

"MyWallStreetJourn-hoo," said Miller Tabak + Co. analyst David Joyce when asked about the possible benefit of a deal for News Corp.

The Citigroup analysts estimate that the deal alone could provide "about $1.50 upside to News Corp. shares." Among the benefits for the media giant are a diversification out of social networking and the ability to own an economic stake in the paid-search business. Both would "offset the optical risk of removing MySpace growth from News Corp.'s income statement," Bazinet and Mahaney said.

For Yahoo, the benefits would include a diversification into social networking; greater exposure to secondary ad inventory that MySpace supplies to marketers via Right Media, which Yahoo recently acquired; and a potential ouster of Google Inc. from its paid search agreement with MySpace.

Most Street observers agree that Yahoo would benefit if Google makes way for Yahoo as MySpace's search provider. But they added that this could be a mixed blessing for News Corp.

After all, the company would lose a revenue sharing arrangement that, according to Joyce, is "tangibly enabling News Corp. to pay for its MySpace acquisition within three years of acquisition."

Yahoo shares edged up 0.1% on Wednesday to $27.66. News Corp. voting shares declined 0.3% to $23.60.

Paul Bond in Los Angeles contributed to this report.
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