Strategy: A Latin American coup
www.brw.com.au By Aaron Patrick
It is a tactic that Rupert Murdoch has perfected over five decades: bleed your competitors dry until they close shop or accept an unfavorable merger, then recoup your losses with monopolistic glee. The News Corporation chairman seems to be doing it again in Latin America, where, after years of heavy losses, his main rival in the pay-television market is on the verge of insolvency. The fact that company happens to be DirecTV - the satellite broadcaster Murdoch wants to buy - is the icing on his cake.
SOUTH OF THE BORDER: From Mexico to Argentina, News has been under pressure
DirecTV operates a successful satellite broadcasting service in the United States that has 10 million subscribers, and an unprofitable operation covering South and Central America and the Caribbean.
Murdoch's plan to buy the company has received much attention for the reach it will give him in the US - a broadcaster with 10 million subscribers and the capability to reach almost every home in the country. What has not been highlighted is the potential effect on his interests in Latin America, which happen to be one of the black holes of the News empire.
From Mexico to Argentina, News has been squeezed between expensive US-dollar contracts for Hollywood movies and television shows, and an economic downturn that has savaged the middle class and depressed local currencies.
Sky Latin America lost $US152 million ($259 million) last year, most of it in Brazil and Mexico. To put this in context, News's Australian operations achieved an operating profit of $US125 million ($238 million) last year. The entire profit from Murdoch's 100 or more Australian newspapers was surpassed by the losses in Latin America. Put another way, Murdoch could have doubled the company dividend last year if he had not been subsidising television soap operas for rich Mexicans.
But the size of the operation becomes clear only when it is realised that News is sharing the losses with its partners in Sky Latin America. If News's losses are in proportion to its level of ownership, then the joint ventures that Sky Latin America signed with Brazil's Globopar, Mexico's Grupo Televisa and John Malone's Liberty Media have lost $US1.2 billion ($2 billion) over the past four years.
It is an expensive strategy that increasingly looks like a replay of Sky Television in Britain in the late 1980s, when Murdoch ran up huge losses while running his competitor, BSB Holdings, into the ground. Financially exhausted, BSB's backers agreed to a merger in 1990 that created BSkyB, an asset now worth $12.5 billion to News shareholders.
Just like BSB, DirecTV Latin America is fighting for its life. As Sky's subscriber numbers in Brazil and Mexico increased 3% to 1.4 million last financial year, DirecTV lost $US202 million and 2% of its customers. It expects revenue to fall this year and has not been helped by the fact that two of its operations are in Argentina and Venezuela, which have serious economic and political problems.
In January, DirecTV hired a corporate turn-around expert and said it might seek Chapter 11 bankruptcy protection under US law, a step companies take when they are about to become insolvent. The chief executive, Eddy Hartenstein, says he may take the drastic step if programming contracts cannot be renegotiated by the end of January.
This would not necessarily lead to DirecTV Latin America being wound up because US companies are allowed to trade out of bankruptcy. But it would be a clear signal to suppliers, creditors and customers that Sky is the more stable satellite broadcaster in the region - and may soon be the only one.
DirecTV Latin America's chairman, Kevin McGrath, told investors on January 15: 'Our company's financial position is unacceptable and an acceptable solution must be executed urgently.'
Embarrassingly, DirecTV may be unable to pay the money it owes to the satellite operator PanAmSat. It and DirecTV are owned by the same company, Hughes Electronics.
In News's New York headquarters there is great interest in DirecTV's woes. News is refusing to publicly declare victory but, for months, Murdoch has been confident that he is close to winning the battle.
Analysts assume that DirecTV's problems will strengthen Murdoch's hand in negotiations to buy a controlling stake. Talks have been going on for two years, and News's chief operating officer, Peter Chernin, says he expects a decision from DirecTV by the end of January. DirecTV said in the second week of January that it would take between 30 and 60 days to reach a decision.
The view on Wall Street is that News and its partner Liberty Media will each take a 17% stake, and Murdoch will assume management control at a cost of about $3.5 billion.
A top priority after a purchase would be to either merge the Latin American networks or close one of them, creating a satellite-TV monopoly from the Rio Grande to Rio de Janeiro. David Gibson, a media analyst for Macquarie Bank in New York, puts a rough estimate on the savings to News at $US200 million. 'The real drivers would be in marketing, lower content costs and lower subscriber acquisition costs,' Gibson says. 'But it is pretty hard to judge exactly how much it would be worth, and they would still have to compete with all the cable companies down there.'
First, Murdoch would have to clear a few regulatory hurdles. Mexico's anti-monopoly watchdog, the Federal Competition Commission, would frown on a merger between DirecTV and Sky, says the chief analyst for Santander Investment in Mexico City, Francisco Rivero.
It would be ironic if Latin American regulators blocked a merger between Sky and DirecTV on the grounds of monopoly, because Murdoch was given his chance to buy the company by US regulators, who rejected the preferred bidder, Echostar, for the same reason.
While Murdoch pursues his latest acquisition, his senior executives have been promoting a new image for the company. They say News has reached the point where decades of assembling an integrated global media business are starting to pay off in the form of huge sums of cash. 'After years of building our assets with patient investment and organic growth, we are now at the point where success begets success,' Chernin told a Salomon Smith Barney conference in January.
The 'new' News provokes responses ranging from sympathy to cynicism. The head of a hedge fund for one large investment bank says Murdoch, 71, has become 'financially respectable' since News's close call with bankruptcy in 1990. 'I don't think he ever really was not respectable, but that was the image around him,' the fund manager says. 'But he is back and he has got a solid balance sheet behind him, and people feel more comfortable with him these days.'
The head of a share-trading desk in New York says: 'If you are posing the question, 'Is Rupert Murdoch the new cleanskin?', for every person who says he is, there are a whole load of people who think he is not. But you talk to investors here about the writedowns at One.Tel or Gemstar and they either don't know about them or don't care.'
In the five years to the middle of January, News Corporation shares rose about 50%, compared with 18% for the S&P/ASX 300 index. But most of News's gain has come in the past four months with a recovery in the US advertising market.
Target tactics
- After years of heavy losses in the Latin American pay-television market, News Corporation's main rival there, DirecTV, is on the verge of insolvency.
- News Corporation has been negotiating to buy DirecTV.
- If DirecTV folds, News Corporation will have a monopoly in Latin America.
Source: BRW The two known events with the most potential to move the share price in the next month are the terms of any deal on DirecTV, and News's first-half profit result, due for release on February 10 or 12. Helped by a weak result last year, it is likely to show that operating earnings are on track for a full-year increase of 20%, to $US2.2 billion.
Some analysts, particularly Merrill Lynch's Jessica Reif Cohen, are talking up the stock and telling investors who want to board the Murdoch bandwagon to look at the US-listed Fox Entertainment Group, 80% owned by News Corporation.
Fox is a pure play in the US media - there is no Sky Latin America in it - and can expect to benefit disproportionally as the US economic recovery continues.