U.S. institutional investors, never large fans of Rupert Murdoch's News Corp., reduced their holdings by at least 23 million shares shortly before the company grabbed eight major-market TV stations from CBS for its Fox television network.
Overall, at the end of the first quarter, U.S. institutions controlled only 19.7% of the company's American depository receipts issued and 2% of its ordinary shares outright, low for a global media empire that some analysts think has put all of the pieces together.
Immediately after its coup of gaining the CBS affiliates May 23, News Corp. stock jumped May 24 by 2 to 547/8.
Dan Miller, portfolio manager of the New Opportunities Fund at Putnam Investments, Boston, said the firm sold its News shares earlier in the year, calling the industry "too frothy."
At Wood, Struthers and Winthrop Management Co., New York, James Engle, chief investment officer, said the "leverage in News Corp. has always scared us off."
"We don't own any of the stock or ADRs and we won't be into any soon," Mr. Engle added.
"News Corp. has so much leveraged debt that any bumps it might encounter in the course of expansion might derail the whole train," Mr. Engle said. "Whatever successes he may have are shadowed by what could happen with even the smallest setback because of debt loads."
Yet in interviews, more analysts and money managers were enthusiastic than pessimistic about the prospects of the company and the leadership of Mr. Murdoch, chairman and chief executive officer, perhaps foretelling a growing attractiveness.
One of the company's largest U.S. institutional shareholders, State Street Research & Management Co., Boston, has held a significant position in News Corp. since 1989, with current holdings at 1.8 million shares.
"I think a key ingredient for us is the fact that News Corp.'s chairman has a correct strategic vision of how the media world of the 1990s will develop," said Larry Haverty, senior vice president.
"Unlike many other media companies worldwide, virtually all of News Corp.'s cash flow is from businesses that are unregulated. Compare that with Time Warner, which has at least 40% of its cash flow coming in from businesses that are heavily regulated.
"This company (News Corp.) and (Walt) Disney (Co.) are the only two media companies working in largely unregulated businesses. We really like that. We like to own companies where the business climate is unlikely to be affected by unpredictable government actions."
Among other analysts, George Reed Dellinger, vice president, NatWest Washington Analysis, Washington, a unit of NatWest Securities Corp., New York, said: "It's one of the few companies that has all the pieces of the telemedia puzzle. They have distribution and content. We rate it a buy.
"They pulled a coup on getting those affiliates (from CBS). I don't think he'll have trouble getting FCC approval.
"You can't find an organization that has it all together like Murdoch," Mr. Dellinger added. "It's global, it has content and it has distribution - newspapers, satellite (TV), and the fourth network."
At Smith Barney Co., New York, John Reidy, media analyst, was effusive in his praise.
"Mr. Murdoch is without peer as an asset builder and manager," Mr. Reidy said. "Not every quarter going forward will necessarily be outstanding in terms of performance; some will be slower. But overall, you're looking at a manager without equal. Mr. Murdoch is an opportunist and eclectic entrepreneur; he won't stop here in terms of expanding News Corp."
At Zevenbergen Capital Inc., Seattle, Brooke de Boutray, principal, said: "We are very positive about News Corp. It's one of our core holdings, representing between 3% and 3.5% of our total portfolio. I really like the company because it's the most diverse media company in terms of both its geographic coverage and its business lines.
"It's like no other media company out there, because of its global reach and its diversification. It's a very vertically integrated company."
But indicative of the trend of money managers in selling the stock is Putnam's Mr. Miller.
He said Putnam executives believed earlier this year the media and entertainment industry was getting "too frothy," or overvalued, and holdings in that sector were reduced. Because the fund focuses on smaller-capitalization, fast-growing companies, the larger, slower growing companies were sold off. News Corp. was among them.
Putnam's New Opportunities Fund had held 90,000 ADRs of News, worth $4.5 million, or 1.34% of the fund's total portfolio, before it sold them, according to the institutional holding report of Vickers Stock Research Corp., Huntington, N.Y.
In aggregate, the 209 U.S. reporting managers - including separate account money managers, mutual funds, insurance companies, banks and in-house-run college endowments and pension funds - that held News Corp. through ADRs in the first quarter reduced their positions by 4.5 million shares. (Each ADR represents eight underlying ordinary shares.)
At the end of the period, they owned 41.9 million shares, or 19.7% of the 212.6 million shares trading in ADRs, according to Vickers.
In addition, some 92 U.S. reporting institutions, mostly U.S. money managers, own directly only 34.1 million of News ordinary shares, or common stock, a drop of 15.8 million shares from the previous quarter, according to Vickers.
News has outstanding some 1.8 billion ordinary shares, including those bundled in ADRs.
By contrast, non-U.S. institutional investors, especially Australian companies and pension funds, and Mr. Murdoch together hold an overwhelming majority of the Sydney-based media and entertainment conglomerate.
The biggest holder is Cruden Investments Pty. Ltd. with 581.4 million, or 32%, of the ordinary shares, according to News' latest annual report. Mr. Murdoch and his family control Cruden. In all, excluding the Citicorp Nominees Pty. Ltd. and Chase Manhattan Nominees Ltd., non-U.S. institutions hold 67% of the News ordinary shares, according to the report.
News Corp.'s global reach into television markets is vast, with a presence on every continent except Antarctica. Some of News Corp.'s latest moves, orchestrated by Mr. Murdoch, include the deal with New World Communications Group Inc. that swiped away major CBS affiliates in Dallas, Detroit, Atlanta, Cleveland, Tampa, Phoenix, Milwaukee and Austin, Texas, expanding the U.S. reach of Murdoch's Fox Broadcasting Co. network.
News Corp. also has been busily customizing programming to fit countries serviced by Star TV, a start-up satellite television company serving Asia in which News Corp. purchased a 64% stake last year. Catering to varying national tastes in sports, movies and music, Star TV will beam native-language programming to markets as diverse as India, Indonesia, Hong Kong and China. The company's global reach into television markets is further expanding through its 50% stake in British Sky Broadcasting Ltd., also known as BSkyB, a European satellite network.
"It's a very inefficient stock to hold in the States," said State Street Research's Mr. Haverty. "It requires a tremendous amount of research to understand its complicated structure and the global reach of its businesses. The (U.S.) market is running too fast for most people to take the time to do the kind of in-depth research a company like News Corp. requires. We've made a lot of money in the last four years exploiting this inefficiency, and will make more money in the future because of it."
Even some News detractors acknowledged its rising pre-eminance in the industry.
"Rupert Murdoch has been doing a lot of things right," acknolwedged Mr. Engle of Wood, Struthers and Winthrop. "Where his broadcasting networks have been short of content, he's pumped up that side. Where distribution systems have been weak, he's beefed up that side."
But Mr. Engle worried, "The debt is really high in both the operating companies and the parent company."
"But the real trick going into the future will be to make it to the finish line," Mr. Engle continued. Mr. Haverty of State Street Research disagrees.
"I think the company is actually underleveraged, given that it's in an extremely high cash flow generating mode," Mr. Haverty said. "The company is making hundreds of millions of dollars now which can be used to free debt load and make more acquisitions. We measure debt leverage as a cash flow measure of interest and according to that scale, leverage has been going down every quarter. Every quarter that BSkyB becomes worth more, that debt goes down and more cash is free for further business development."
News Corp. had $9.4 billion (Australian) in non-current debt, while its shareholder equity was $14.3 billion Australian, according to its financial report.
Its U.S. operations account for the bulk of its revenue and operating earnings. For the nine months ended March 31, its U.S. operations accounted for $5.8 billion Australian of its total $8.4 billion in operating revenue and $765.9 million of its $1.16 billion in operating income.
Zevenbergen Capital's Ms. de Boutray said, "I'm not too worried about any potential debt problems since the company's debt-to-total-capital ratio is 55%, much better than its competitor, Time Warner, which is 89%."
Since its financial troubles stemming from its huge leveraged balance sheet, Mr. Dellinger said, "It restructured its debt. It's not as leveraged."
Smith Barney's Mr. Reidy added, "It has taken gigantic steps forward. It had financed (with debt) so much of its acquisition program in the mid-1980s that it was extremely overleveraged.
"But in 'Operation Overlord' in 1989 and 1990, Mr. Murdoch and the company went to every single credit bank they had deals with and revamped those agreements. They sold off unrelated businesses, primarily U.S. travel companies and other businesses, and made some of the Australian magazines into stand-alones.
"The debt equity and equity equivalent deals they redesigned swung the company into a much better financial situation and News Corp. continued to make smart merger and acquisition deals, like that with British Sky Broadcasting and Star Television in Asia," Mr. Reidy added.
"The Twentieth Century Fox film studios are roaring back now. The recent New World deal to gain (CBS- and other network-affiliated) television stations is part of Mr. Murdoch's plan to build networks for the long haul. The company now bears no relevance to the company of 1990."