Issues & Opinions

As noted in the addendum to last evening’s entry, the Bancroft family, with minority economic interest but majority voting control over the sale of Dow Jones, decided against the deal.

For now, anyway. In an evening email dispatch today from WSJ, this:

Dow Jones directors took no immediate action on a $5 billion offer from News Corp., increasing the potential for tension between the controlling Bancroft family and shareholders pressing for a sale.

Directors confirmed that roughly 80% of the family’s voting power opposes the offer, representing about 52% of the voting power of the full company. The thin margin means a defection by a relatively small number of family members could swing the vote the other way.

Additional details are available in the full story linked to that email message, entitled “At Dow Jones, Focus Is On the Bancroft Family” at the WSJ site, including this:

The company’s demurral only ratchets up the potential for tension and confusion among the Bancroft family, the Dow Jones board, and shareholders pressing the company to sell itself.

So this “no action” is not yet the same as a “no, thanks”. Since several possible outcomes exist for this proposed transaction, I, like many, many others, think it interesting to try intelligently predicting which will succeed in the end. I’ve got no skin in the game, being neither long nor short the securities of any of the current or possible future players, so any educated guesses I might make can be wrong with no adverse effects other than the (extremely mild) embarrassment of having been wrong.

Those possible outcomes include:

• Status quo – Bancrofts say no, as is their right, and no it is
• Mr. Murdoch is able to convince some small number of the 80% “against” voters to change their minds – if something like 2.5% of the dissenters’ shares changed votes, the Bancrofts as a bloc would no longer be able to block the deal
• Other industry participants (Bloomberg, Gannett, Thomson, Reuters, Pearson, Washington Post, etc.) could enter the bidding for strategic reasons, since the WSJ, among other DJ divisions, would be a stellar addition to any media portfolio
• Private equity could enter the fray as financial buyers

Several ground rules seem apply to the analysis, I think.

• Murdoch started with a knock-out bid, specifically because he could afford to, the prize is worth it to his company, and he wanted to avoid turning this into an auction of indeterminate length and outcome. His offer is something like 50x last year’s and 40x this year’s expected earnings, and 16x this year’s EBITDA.
• With the action in the stock this week, there are sure to be plenty of new owners of the class A (non-Bancroft) stock, looking for the $4/share or more between their purchase prices and the News Corp offer, agitating vigorously for a deal to be done.
• It’s entirely possible that the board, even with a majority of votes, could decide not to sell the company, based on this bit of info from the full WSJ article linked above:
  

  The company’s incorporation documents give it some latitude to consider the effect “of such a transaction upon the independence and integrity of the corporation’s publications and services and the social and economic effects of such actions.”

  In short, the board’s fiduciary duty to accept a large bid is not absolute.

With all that in mind, I’d like to handicap the four possibilities first mentioned above.

Status quo: The Bancroft family is not monolithic, and the WSJ reported that some of the younger members of the family are less enamored with keeping the company than their elders. The class B stock does, however, hold 25% of the board seats, and could well direct their board votes against a deal, even if enough of the super-voting B shares were in favor to tip the overall share count past 50%. The Bancroft faction of the company has been pressured over the years by non-family stockholders, and has ignored them. The family also has no fiduciary duty to the other stockholders, and can say no for any reason, or for no reason. Given the small shift in sentiment within the Bancroft family needed to get their bloc vote below 50%, I don’t think the Bancrofts will be able to stand alone in the way of this deal.

Mr. Murdoch convinces some Bancroft shares to change: As stated above, this seems likely. We can’t ignore the possibility that of the 36% of the votes outside the family control, not all are guaranteed to be in favor of a deal. I say that primarily because it has to be said. However, let’s be serious – if 23% of the Bancrofts’ shares go for the deal, the rest of the stockholders will, too.

Other industry participants: Of the companies I randomly selected (Bloomberg, Gannett, Thomson, Reuters, Pearson, Washington Post), only the first three seem to have the balance sheets required to pull off a $6 billion deal, with Bloomberg’s balance sheet being a guess on my part, since they’re private. With Murdoch’s bid of $5 billion, the next incremental bid’s difference, if it occurs, isn’t going to be small, and won’t likely be less than $500 million. Why? Because under the circumstances, News Corp isn’t likely to think much of the difference between 16x and 18x EBITDA, where the others would need to.

And News Corp isn’t guaranteed to need any debt financing at all for the deal. Aside from noteworthy strategic synergies, you don’t get wealthy paying higher multiples (earnings, sales, EBITDA, what have you) than the market pays for your own stock. I believe that Murdoch’s offer is already high enough to have iced the other industry players, barring some odd corporate coupling, like Warren Buffett teaming up with WaPo to do a deal. Overall, I don’t expect competitive strategic bidders will emerge.

Private equity comes out to play: Initial reaction to this: highly unlikely. Private equity can’t make money in a financial transaction at a multiple of 16+ times cash flow, and has no obvious venue in which to meld serious strategy into the calculus. Or do they? In today’s “PE Week Wire” email (from, of all places, Thomson Financial), Daniel Primack provided this analysis:

Private equity firms could certainly afford the deal — $5 billion has become chump change – but they would run into that glaring multiple problem. Murdoch doesn’t mind overpaying because Dow Jones is of strategic value to him (Fox Biz Channel), whereas private equity firms would be stuck with an overpriced stand-alone asset. Unless…

What if a private equity firm did a sponsored spinout of NBC from General Electric, and acquired Dow Jones as part of the deal? I know it’s a long-shot, but so are many of the best private equity transactions…

Nifty analysis, and I think he’s right on the basics of the possibility. I also think it doesn’t matter, because Murdoch’s proposed deal is quite a bit cleaner, and thus quite a bit less risky, so Murdoch can outbid them. So, no, I don’t think private equity will end up a successful player in this one.

It seems that the only thing likely to stand in the way of a News Corp purchase, then, is the possibility of the bylaws being used to prevent degradation of the independence, integrity, etc. of the venerable WSJ portion of the company. Given the dynamics of the other choices available, along with News Corp’s desire to break up the link between Dow Jones and CNBC, taking the Wall Street Journal name into its stable for its planned Fox Business Channel, Murdoch has to be considered the front-runner in this particular race, and I expect that before the end of May, a deal will be inked that preserves the stellar name and operations of the WSJ, clearing what I think would be the last hurdle to doing such a deal.

But hey, I could be all wet, and your mileage may vary.

Addendum – In the May 3 issue of PE Week, Daniel Primack added this:

*** I reached out to some media buyout folks yesterday, and heard absolutely no interest in acquiring Dow Jones. More specifically, I heard no interest in acquiring Dow Jones at a price that could beat Murdoch. Pearson is now considered the most likely (albeit still unlikely) to offer a rival bid, although I think Bloomberg makes more sense from a strategic perspective. It’s possible that my own corporate overlords are giving it thought (we certainly have the money and M&A fever), but my biased perspective is that integration would be too difficult.

As mentioned earlier, Pearson was a possibility I looked at and discounted, because they don’t have the balance sheet to do such a deal without outside debt, and they can’t finance the multiple of EBITDA Murdoch’s already willing to pay. Game over?

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