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Friday, 19 September 2014

Rupert’s ring

Rob Cox: Listen to Murdoch's muzzled minorities

Time Warner shareholders pondering whether to surrender to Rupert Murdoch would be well advised to listen to the media mogul’s muzzled minorities. Most Twenty-First Century Fox believers are relegated to owning non-voting stock in the entertainment conglomerate, the same second-tier paper on offer as part of the $80 billion takeover bid for the owner of HBO, CNN and Warner Bros. studios. Despite broad investor overlap in the two companies, the record shows a clear distaste for Murdoch’s imperialism.

It takes a little simple division to work out the fair-and-balanced view from Fox shareholders not named Murdoch. That’s because the bulk of the company’s equity capital – 65 percent to be precise – comprises Class A securities, which prevents their owners from voting on most matters of interest, like choosing the board of directors or vetting executive compensation. There are about 1.5 billion of these shares outstanding.

Fox’s less liquid Class B shares carry all the voting clout. There are about 800 million of these, with Murdoch entities controlling approximately 315 million of them. That translates into an economic interest of about 13.6 percent in the company, but an outsized 39.4 percent of the vote. Fold in another 56.2 million shares held by Murdoch pal Saudi Prince Alwaleed bin Talal, and his consolidated voting stake rises to 46.4 percent.

In rejecting Murdoch’s approach, Time Warner boss Jeff Bewkes argued that his company’s shareholders wouldn’t want to swap their shares, which grant them the democratic right of a corresponding vote, for securities that leave them voiceless and powerless. The Fox camp retorts that since up to 70 percent of Time Warner shareholders also own Fox shares, they clearly are not fussed by the discrepancy.

That’s complete hogwash. While the price of any deal will be the primary consideration of a Time Warner shareholder, the composition does matter and votes do count. Look no further than the plaintive cries of Fox’s Class B shareholders to see that ownership is not equivalent to approval.

At Fox’s last annual meeting in October, Class B holders got their non-binding say on the company’s directors and a handful of other matters, including executive pay and a proposal from an individual stockholder to adopt a policy that the chairman of the board, now Murdoch, instead be an independent director. Naturally, all the board members passed with flying colors, as did the pay plan. And that pesky shareholder proposal was roundly defeated.

Adjust the votes to remove the Murdochs and Alwaleed, however, and a different picture emerges. Start with the board, where Murdoch’s sons Lachlan and James were opposed by the vast majority of minority investors – 91 percent and 72 percent, respectively.

The compensation plan secured 431 million yes votes and 78 million nays. Subtract the approvals of Murdoch and Alwaleed and just 60 million shares landed in the yes camp. On that basis, some 56 percent of shareholders opposed it. Perhaps most tellingly, on a Murdoch-adjusted basis, every share that did not abstain voted in favor of the resolution calling for an independent chairman, despite Fox’s exhortations that they oppose the measure.

So if the majority of Fox’s voting shareholders who are not part of the Murdoch or Saudi kingdoms disagree with the corporate chieftain, then why do they own the company? For starters, the fear of missing out, or FOMO in the popular vernacular, is as powerful for fund managers as it is for the “Glee” demographic. Owning Fox has proven lucrative. Over the past five years, the shares are up 258 percent, pacing Time Warner’s gain, though trailing the performance of larger Walt Disney.

And for all their gripes with Fox’s governance, and clear disdain for Murdoch’s offspring, they sure like the man himself and his right hand, Chase Carey. Even stripping out the votes he cast for himself, and those of Alwaleed, Murdoch garnered a two-thirds approval rating. The Fox president and chief operating officer with the handlebar mustache received 72 percent.

The schizophrenia isn’t unusual. Investors generally dislike dual-share structures that strip away their rights but are often willing to tolerate them as a quid pro quo for riding the coattails of a visionary entrepreneur with years of value creation ahead of them. It’s why similarly Murdochian arrangements have been adopted by hot tech companies like Facebook and GoPro.

There are important distinctions, though. The founders of those firms, Mark Zuckerberg and Nicholas Woodman, respectively, are in their 30s and still in the early stages of their careers. Though both own super-voting stock, their economic interests in Facebook and GoPro are also still substantial.

By comparison, Murdoch is 83. And if his Time Warner offer were to succeed as initially proposed, he’d own less than 10 percent of the combined company. While there are merits to uniting the two film and TV empires, there is no reason for Time Warner shareholders to rush to kiss Murdoch’s ring.

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