News Corp shares soar as markets digest MCI deal

A very sweet move or paying over the odds for tinsel? Mathew Horsman and Mary Fagan report

Shares in Rupert Murdoch's News Corp soared yesterday, as the implications of its alliance with MCI, the telecommunications giant,began to sink in.

Analysts said the deal, which for the first time genuinely brings together entertainment, broadcasting and telephony under one corporate roof, marks the biggest step yet toward creation of the information superhighway.

Together, the two companies said they would aim to provide films, television, financial data, educational material and other services directly to the businesses and consumers, using News Corp's stable of entertainment and information assets and MCI's telephone network and marketing prowess.

"It's a very sweet move for News Corp," Paul Wignall, head of the multimedia consulting group at Ernst & Young, said. "They've lined up a very established player in the telecommunications business, and have generated cash at the same time."

MCI shares fared less well, losing ground in early trading in New York. "For News Corp, this is a win-win situation," one analyst said.

"They get cash and a window on the telecommunications market. MCI will have to wait to see how the investment works out. It certainly won't show up in earnings any time soon."

Some industry observers were equally critical. "There seems to be a steady stream of telephone companies prepared to pay over the odds for a bit of tinsel," one senior media executive said.

But most analysts applauded the deal. "This gives MCI access to content at a time when there is a shortage of content," one leading media analyst said. "All telecommunications companies are looking to join content providers, and MCI didn't want to be left out."

A senior News Corp insider said the company's entertainment assets would be the "locomotive" of the alliance. "Down the road, interactivity and digital TV will be important, but it is the entertainment that counts."

Under the deal, MCI, 20 per cent-owned by BT, will pay up to $1bn for preferred stock in News Corp, with an option to acquire an additional $1bn worth. The initial investment will pay a dividend after tax of $38.7m. Each $1bn investment entitles MCI to 38,834,951 American depository receipts; if the full $2bn is paid, MCI will end up with 13.5 per cent of News Corp.

The shares will carry voting rights, but these would lapse if MCI were to sell its stake. In addition, MCI must vote the shares in the same proportion as shares voted by other owners, including those held by Mr Murdoch and his family, who own 36 per cent. MCI will also be invited to raise its stake to as high as 20 per cent through open market purchases.

Although the Murdoch interests will be diluted through the acquisition, Mr Murdoch's own control will remain secure.

Company insiders said the alliance was the result of several months of talks between a small team of executives from both sides. Toward the end, Mr Murdoch and MCI chief executive Bert Roberts were actively involved.

The two men were said to have a healthy respect for one another. Mr Roberts, an engineer by training and a 20-year veteran of MCI, is known internally as a legendary marketer and one of the company's true visonaries.

He represented the telecommunications industry on the US government's National Information Infrastructure Advisory Council and has been widely and flatteringly profiled in the American trade press.

Under his leadership, MCI, with annual sales of $13bn, has eroded AT&T's hold on the long-distance telephone market and pushed into ancilliary markets such as data and video communications, electronic mail and network management.

For his part Mr Murdoch, at least since his brush with bankruptcy in 1991, following an acquisitions binge, has seen his fortunes rise and rise, as any shareholder who bought the stock at its 1991 low can attest.

News Corp, now one of the world's largest media companies, owns the Hollywood studio Twentieth Century Fox as well as Fox Television, a controlling stake in Star TV, the Asian satellite broadcaster, and 130 newspapers in the UK, Australia and the US. It also has a stranglehold on the UK pay-TV market through 40 per cent-owned BSkyB.

The MCI-News negotiations, while long, were amicable, insiders said. One sticking point was Mr Murdoch's insistence on attaching voting restrictions to the shares MCI was to buy. MCI might have paid more than $2bn had it not been for the restrictions. As it was, MCI paid a 20 per cent premium to the market price on the day the deal was announced.

News Corp declined to specify how the cash will be spent. Mr Murdoch is thought to be building reserves to help pay for the expected transition to digital television in Europe and the US, which will allow several signals to be broadcast over a single channel. He has also hinted that he would like to invest in the music business, where News Corp has no presence.

At least initially, News Corp will not be putting much of its new cash into his link with MCI. At the core of the alliance is an agreement to establish a joint venture to market multimedia services globally.

Capitalised at $400m initially, on a 50-50 basis, the new venture will provide a range of services, most of them linked to News Corp's existing "software" products, such as films, TV programmes and news services.

"This is a concept," Katherine Pelly, analyst at Kleinwort Benson Securities, said. "There is no product launch, no revenues, no infrastructure."

Despite the lack of detail about the joint venture's commercial prospects, most analysts agree the future for multimedia companies is bright. The prospects have enticed several companies to strike alliances, most recently Disney and AT&T, the largest long-distance operator in the US, and Microsoft and DreamWorks, the film, television and multimedia joint venture created by famed director Stephen Spielberg, former Disney chief Jeffrey Katzenberg and David Geffen, the music impressario.

The MCI-News link dwarfs the other alliances, however, given the size of the two players and the range of their interests.

Comment, page 33

Recent multimedia marriages

Viacom-Paramount film, television, cable

Time-Warner electronic publishing, magazines, films, television, cable

Pearson-Mindscape publishing, theme parks, television,broadcasting, electronic publishing

Disney-AT&T films, television, theme parks, telephony

MCI-News Corp. cable, satellite, telephony, publishing, electronic publishing

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
Life and Style
Jack Cooksey goes for the grand unveiling - moments before dropping his new iPhone 6 on the floor
iphone launch
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Liam Neeson said he wouldn't

Liam Neeson's Downton dreams

Yaya Touré (left) and Bayern Munich’s Spanish defender Juan Bernat
Arts and Entertainment
A spell in the sun: Emma Stone and Colin Firth star in ‘Magic in the Moonlight’
filmReview: Magic In The Moonlight
A 'Sir Alex Feguson' tattoo

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear

Thriller is set in the secret world of British espionage

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week