What Does News Corp.'s Offer to Dow Jones Mean?
"Friendly" doesn't even begin to describe the offer Rupert Murdoch made to Dow Jones & Co. on May 1. Murdoch's News Corp. (symbol NWS) delivered an unsolicited -- but, Murdoch swears, friendly -- offer to buy the publisher of the Wall Street Journal for $60 a share, either in cash or a combination of cash and News Corp. stock. That's a 65% premium to the stock's previous close -- a price the stock hasn't seen since April 2002. Dow Jones stock (DJ) jumped $20 almost immediately after news of the offer broke on CNBC, and trading was even halted briefly at midday. It closed up $19.87 or 55%, at $56.20. News Corp. shares closed at $22.99 down $1.01, or 4.2%.
The offer touched off speculation in other media stocks as well: The New York Times Co. (NYT) rose 6.5%; McClatchy Co. (MNI), 3.5%; Washington Post (WPO), 2.9%; and Gannett Co. (GCI), 2%. The surprise offer, delivered two weeks ago in a letter, "says the print media business is not dead," says Roy Behren, manager of the Merger fund, a mutual fund specializing in takeover situations. Media stocks have languished lately amid slumping ad sales and worries about online competition.
Dow Jones, which also publishes Barron's and owns the MarketWatch Web site, has rebuffed offers in the past but confirmed that it is considering this one. The company has two classes of stock, a structure that concentrates voting power in the hand of the Bancroft family, which owns over 24% of the outstanding shares but controls 64% of the vote. Just before the market closed, however, Dow Jones said a slight majority of votes was opposed to News Corp.'s offer -- enough to block it.
Whether the family is truly opposed to selling or just playing coy to up the ante will become clear as the takeover dance unfolds on Wall Street over the next few months. "We don't think any party offers their best offer on the first shot," says another mutual fund manger specializing in mergers, John Orrico of the Arbitrage fund. He adds, "We don't think this is the only buyer either." Indeed, the list of potential suitors bandied about included everyone from Warren Buffett (whose Berkshire Hathaway owns a sizable chunk of the Washington Post) to GE (the parent to business cable network CNBC) to digital media giants Yahoo and Google.
Says John Linehan, who manages T. Rowe Price Value fund, a Dow Jones shareholder with about 1% of the outstanding shares: "You've seen people come out of left field to buy newspapers. The Wall Street Journal has a national voice and a unique demographic -- there's a lot of value here."
News Corp.'s bid follows one in April for the Tribune Co. (TRB), which agreed to be taken private in an $8 billion deal led by real estate investor Sam Zell. Last year, the McClatchy Co. bought Knight Ridder Inc. Looking at the whole market, low interest rates and a flood of cash on corporate balance sheets and at private equity firms has pushed the total of announced buyouts to $620 billion so far this year, up 30% from this time last year.
At $60 a share, Dow Jones would cost News Corp. roughly $5 billion -- an acquisition that would not significantly affect results in a media conglomerate with a healthy, cash-rich balance sheet and a market value north of $70 billion, analysts say. Fitch Ratings, the debt-rating company, says News Corp. could fund the whole deal with debt without damaging its credit rating.
Still, the bid represents a premium price for a trophy property, valuing Dow Jones at 33 times next year's expected earnings of $1.80 a share -- nearly double News Corp.'s own price-earnings ratio of 17.5. But Murdoch has long been enamored of Dow Jones. Investment pundit Jim Cramer said on TheStreet.com that Murdoch expressed interest in Dow Jones to him about ten years ago when he was a shareholder and the stock was in the low $40s. Cramer said he suggested a price then of $73 share.
Though News Corp.'s roots are in newspapers, the company now is best known for its movie and TV studios, its Fox cable network and, more recently, it's acquisition of Intermix Media, parent of the online social networking site MySpace. Earlier this year, News Corp. announced it would launch a business news channel to compete with CNBC -- which could be a motivation for acquiring Dow Jones, says Morningstar analyst Jonathon Schrader. "Rupert recognizes how valuable that franchise can be. He wants to leverage what is probably the best source of business news in the world."
What should investors do? Don't jump into newspaper stocks now with the idea that bidding wars will break out all over. They won't. There are few buyers for whom a traditional newspaper business makes strategic sense, and the rally in most of Dow Jones' competitors will likely fizzle. If you're lucky enough to be a Dow Jones shareholder, by all means, take some profits now, but don't be afraid to hold on for a better deal.