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Shareholder money funds Murdoch family deals

By Allan Sloan
Thursday, February 24, 2011; 11:33 PM

The Murdoch family owns only about 12 percent of News Corp., but Rupert Murdoch sure runs the place like a wholly owned family candy store. The company, blurring the distinction between public and family business, makes deals with family members, using shareholder money to get them into the corporate fold.

The most recent example is the $675 million deal for News Corp. to buy Shine Group, a London-based TV production company majority-owned by Murdoch's daughter, Elisabeth. As part of the deal, she'll go on News Corp.'s board. In other words, News Corp. is buying Elisabeth, not just her company.

Once at News Corp., she'll be competing with two board members, her brothers, James and Lachlan, to become the next leader of News Corp., the world's biggest and most influential media company. Its properties include the Fox networks, the Wall Street Journal, BSkyB and the New York Post.

James has been at News Corp. since 1996, when the company bought an 80 percent stake in his start-up Rawkus hip-hop record label for an undisclosed sum. Rawkus closed in 2004.

James set up his company after dropping out of Harvard. Elisabeth had worked in the News Corp. empire, then stalked out to start her own business. But now, they've both been brought - and bought - into the family fold.

I have no idea whether the Shine deal is a good deal or a bad one for News Corp. Its properties include MasterChef, Law & Order UK and Biggest Loser, but $675 million is a lot of money. What I do know is that Elisabeth Murdoch is the Biggest Winner here. In case you're interested - and why shouldn't you be? - this deal is a payday of about $300 million for Elisabeth and her trusts, owners of a combined 53.5 percent of Shine's stock, according to public records.

News Corp. says it's paying 415 British pounds for Shine, including debt that it's assuming. Subtract 45 million pounds for the debt, convert pounds to dollars, and the 53.5 percent stake is worth about $320 million.

This is the second time Elisabeth and Daddy have done business. The first time, in 1994, Rupert found two California TV stations for Elisabeth and her then-husband to buy, and he guaranteed the $35 million loan they took out to buy the stations. They flipped them less than two years later for a $12 million profit.

Did Rupert, who as chairman of News Corp. has a fiduciary obligation to his shareholders, offer the company the first bite at those TV stations? Did the company's board approve the Rawkus deal that brought James into the company? News Corp. declined to comment. The company says that its attorneys vetted the tentative Shine transaction (which is an agreement in principle) and that the board approved it unanimously and will vote again after negotiations.

Four years ago, News did a multibillion-dollar deal to cement Murdoch family control: trading assets and cash to John Malone's Liberty Media in return for Liberty's News Corp. stock, including a hefty holding of voting shares that threatened the family's control. But News Corp.'s public shareholders got the right to vote on the Liberty transaction. That's not the case in the family deals.

How can Murdoch do this with only about a 12 percent stake in a giant public company? Because only about 30 percent of News Corp.'s shares have voting power, and Murdoch and a family trust own 40 percent of them. And because he's Rupert Murdoch.

Murdoch has turned an obscure Australian newspaper company into a global colossus. On the way, he ignored Wall Street's opinions, took huge risks and generally succeeded. No matter how much you respect him, this all-in-the-family stuff just isn't right for a public firm.

It's one thing to have News Corp. employ family members. But it's a different thing to use assets of a company 88 percent owned by the public to buy businesses owned by Murdoch children. And we may not be done; Lachlan Murdoch still has his own company.

News Corp. preaches free enterprise. But when it comes to Murdochs, the company has a different value: family enterprise.

Allan Sloan is Fortune magazine's senior editor at large. Doris Burke contributed to this article.

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