Wall Street Debates News Corp. Strategy for Cash, Deals After Dropped BSkyB Bid

Observers would like to see Rupert Murdoch's conglomerate return more money to shareholders, and some hope for a sale of its U.K. newspapers.

With its bid for full control of U.K. pay TV firm BSkyB off the table, Wall Street observers are wondering how Rupert Murdoch's News Corp. will now look to use its cash war chest and which businesses it may buy or sell.

On Wednesday, the debate focused mainly on additional stock buybacks and dividends rather than major new acquisitions.

But in that context, questions about deputy COO James Murdoch's and the U.K. newspaper division's future role at the conglomerate also came up again.

"We see increased probability that James Murdoch will reduce his prominence at News to minimize the distraction and that more shareholder friendly actions, including additional [stock] repurchases, could take place," Davenport & Co. analyst Michael Morris said in an investor note. 

Speaking of the future of James Murdoch, who was widely seen as heir apparent for the top job at the conglomerate, one former large News Corp. shareholder told The Hollywood Reporter that president, COO and deputy chairman Chase Carey, rather than a Murdoch, may provide the most stability since he has been untouched by the recent company scandal.

"The stock would go up a lot if people thought he was going to play a bigger role," the ex-shareholder said. "I sold all my stock because I got sick of Rupert...He just runs that thing like it's a private fiefdom."

Nomura analyst Michael Nathanson said on Wednesday that the withdrawal of the BSkyB bid amid a phone hacking scandal at its U.K. newspaper unit may also make the conglomerate rethink its newspaper holdings, which have been unpopular among many investors and Wall Street observers due to a challenging newspaper market. Some have pushed for a sale or spin-off.

"Perhaps this rebuke will force News Corp. to reconsider its ownership of U.K. newspapers," Nathanson said in a report. "We hope this is a turning point for the company’s strategy and asset allocation as the ownership of highly inconsequential newspaper assets has forced the dropping of a strategically important asset."

Similarly, the former News Corp. shareholder told The Hollywood Reporter that "I've been arguing for two or three years to get out of the newspaper business." That person added: "It's a dying business. Now it's come back to bite him. It's a big setback to their global strategy. They're probably going to spend the next couple of years in endless litigation."

The ex-shareholder's solution: "I would love to own News Corp.'s entertainment assets without newspapers, run by [former president and COO] Peter Chernin or Chase Carey."

Besides News Corp.'s business portfolio, the conglomerate's pile of cash also has increasingly moved into the spotlight. On Tuesday, Nathanson had called the growing cash balance at News Corp. "the single biggest area of focus for investors."

Credit Suisse analyst Spencer Wang and others on Wednesday echoed that notion. "The key question is now what?" Wang said in a note to investors.

After a $5 billion stock buyback plan announced on Tuesday, "one could make the case that News Corp. could return even more capital to shareholders given about $12 billion in cash as of March 31," Wang said. "Alternatively, News Corp. could pursue alternative acquisitions, in light of its historical deal appetite."

Cowen & Co. analyst Doug Creutz said that "significant M&A is unlikely while the company deals with issues at News International, but longer term we do not expect News Corp. to give up its historically acquisitive nature."

Neither speculated on possible new acquisition targets, but some observers suggested potential deals in international territories.

While it would have to sit out a six months quiet period before doing so, News Corp. could also take a "renewed run at BSkyB once a decent interval has passed," Creutz suggested.

Wang said he hopes "to receive more clarity" on the conglomerate's planned use of cash when News Corp. reports its latest financials next month.

Creutz also summarized the view of proponents of higher dividend payments and/or stock buybacks. "We were never a proponent of the proposed BSkyB transaction, and preferred that News Corp use its available capital and free cash flow to return money to shareholders, particularly given the company’s troubled history with M&A value creation," he said. "Yesterday’s announcement of a $5 billion buyback was a step in that direction."


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