Murdoch biographers don’t ever get into this stuff, but the biggest threat to Rupert Murdoch’s control of News Corp was always his family. Sir Keith Murdoch left his son only 28 per cent of Cruden Investments, the holding company for the family’s holding in News Limited. Today the family holding is worth $US11.7 billion, but Rupert holds all of it. He’s done some peachy deals in his time, but none as good as the ones he did with his sisters. I wrote this 20 years ago, and it remains unexplored territory. (The super shares referred to here became News Corp’s limited-voting A stock.) Note the crazy suggestion in the intro that Murdoch at 62 was “in the last decade of his working life”. What was I thinking? It clearly speaks of inadequate levels of gin.
Australian Financial Review, Nov 3 1993
THE STORY BEHIND NEWS’ SUPER SHARES
By NEIL CHENOWETH
AFTER 40 years of hard, grafting struggle to escape the shadow of his father, Mr Rupert Murdoch in the last decade of his working life is again consumed with the dynastic fears which marked the last years of Sir Keith.
The obsession with retaining control of his media empire, News Corp oration, has led Mr Murdoch to take desperate gambles. With his latest move, an application to issue super voting shares to News shareholders, he is prepared to take the family company offshore if the Australian Stock Exchange knocks him back – and risk being dumped by local institutions.
This is daunting but Mr Murdoch is driven by deeper imperatives. Without the super shares, he risks losing control of News in a merger with a communications giant like AT&T. At the same time, he needs the super shares to pay for a secret deal he has made to buy family members out of Murdoch private company Cruden Investments.
In the shaky aftermath of the News debt crisis, News watchers believed the Great Acquirer had forsworn all new acquisitions and debt. In fact, Mr Murdoch never stopped buying – but this time his target was family shareholdings. Luck has gone with him, and today he appears to be sitting on a profit of more than$1.2 billion. But, to fund the buy-out, he has needed to put up to $500 million of debt into the Murdoch private companies.
Mr Murdoch is still coping with the fall-out of his last gamble for control in the late-1980s, when complex deals between News and his family companies which cemented his control of News helped bring the media group to the brink of collapse in December 1990.
These deals have been the subject of a secret two-year investigation by the Australian Securities Commission. At issue was whether the ASC would attempt to reverse them, a move which could have cost Mr Murdoch control of News Corp, and sparked a new crisis of confidence.
News is also the subject of queries by the Australian Stock Exchange and the Institute of Chartered Accountants, after a report in The Australian Financial Review last month detailing share trading profits of more than $100 million in an off-balance-sheet company, Dexenne Pty Ltd.
The relationship between Mr Murdoch and the rest of the Murdoch family who hold shares in Cruden Investments, the main holding company for the family’s 32.6 per cent stake in News Corp, has never been fully understood.
Many people are not even aware that Rupert Murdoch is not the only Murdoch with shares in News. In fact his three sisters and their families have held substantial stakes in Cruden – but appear to have received almost none of the News Corp dividends.
The family buy-out dates back to early-1991. News Corp was in crisis, the family companies were in deep trouble, the Australian Securities Commission would launch its inquiry within weeks, and an earlier buy-out plan was off the rails.
It was in the middle of this disaster zone that Mr Murdoch sat down with the rest of the family to work out another deal.
The risks of the deal going wrong had been spelled out several weeks earlier, on a winter evening in London, December 6 1990, when Rupert Murdoch faced the collapse of his media empire.
It is probably the best known episode in News Corp’s debt crisis – and the least understood.
William Shawcross in his biography Murdoch described the evening as the occasion when the loans officer of a small bank in Pittsburgh was about to send News Corporation into receivership because he refused to include a $10 million loan in a critical $1 billion rollover of debt which had fallen due.
Mr Shawcross described News as “minutes away from liquidation”. But at the eleventh hour the Pittsburgh bank folded, agreed to roll over, and News Corp scraped through to the next crisis.
What Mr Shawcross does not mention is that only half of the rollover on December 7 was for News Corp. The other $500 million was for one of the Murdoch private companies, Queensland Press (in which News held a 42 per cent stake, fully diluted) and had been used to buy News shares.
Now the banks seemed to treat the Queensland Press debt as a News liability, giving News had a total exposure of $1.3 billion to the Murdoch companies. It was these deals, which had cemented Mr Murdoch’s control of News, which on December 7 helped bring News to the edge of the abyss.
The Murdochs have always refused to discuss family finances. None of the family members and friends contacted by The Australian Financial Review wished to be quoted and one family member would only confirm that there had been “a bit of money that’s gone around”.
It is a remarkably close family. Sir Keith Murdoch’s eldest daughter, Helen, now aged 64, is two years older than Rupert. She married Mr Geoff Handbury, who farms near Noradjuha in Victoria and has extensive radio interests.
Anne, five years younger than Rupert, married a Melbourne businessman, Mr Milan Kantor, and lives in the Melbourne suburb of Kew.
Janet, three years younger than Anne, lives a few streets away. Her husband, British stockbroker Mr John Calvert-Jones, is a director of Prudential Bache Australia.
Dame Elisabeth, their mother, now 84, continues to live an active life from the picturesque family home, Cruden Farm, on the outskirts of Melbourne. She is one of Australia’s leading philanthropists, directing millions of dollars towards charities, including $5 million to the Murdoch Foundation.
The family holdings were decided in early-1950 when Sir Keith Murdoch, the chief executive of The Herald and Weekly Times Group, was determining how to divide his estate – which included large holdings in Queensland Newspapers in Brisbane and News
Ltd in Adelaide and some HWT shares – between Dame Elisabeth and the four children.
Rather than split the estate, in two codicils to his will Sir Keith bound the inheritance of his four children and his wife into a family company, Cruden Investments.
Sir Keith divided a class of super voting shares between the children, similar to the shares which Rupert wishes to introduce to News Corp.
Helen, Anne, Janet and Dame Elisabeth received shares which have been locked up in settlement and estate trusts for 40 years – a similar scheme to Rupert’s plans for his own children.
The shares left to Keith Rupert Murdoch and his heirs ended up in a trust associated with a company named after his initials, Kayarem Pty Ltd. Today Rupert controls that trust through his authority to appoint trustees.
Cruden’s A shares have 10 times the voting rights of B shares.
Sir Keith left Rupert with only 28 per cent of Cruden’s capital and 36 per cent of the voting rights but he instructed his trustees “to provide the fullest opportunity to my son to have charge of Queensland Newspapers Pty Ltd and News Ltd”.
But the most powerful legacy which Sir Keith left his son has been the bitter taste of disinheritance. Despite instructions to keep the HWT and Queensland Newspapers shares, Sir Keith’s trustees – former HWT colleagues -promptly sold them after his death in 1952. It fostered a deep resentment in Rupert, who saw that despite building the HWT into the country’s leading newspaper group, Sir Keith had not been able to pass any of it to his children, because he did not have shareholding control.
Rupert Murdoch would not make his father’s mistake. His life has been marked by a dogged determination to retain control of both the public and private companies.
With News he did that by raising huge debts and retaining almost all profits.
At Cruden, in two deals he transformed Kayarem’s minority holding into control, ending up in 1987 with 54 per cent of the capital and voting rights.
In the 1980s News recorded $3.5 billion in net profits.
Cruden received $50 million in dividends, of which about half would have gone to Kayarem after tax (Kayarem also earned $50 million from trading in News shares).
But according to a source close to the family, the Kantors, the Calvert-Jones and the Handburys, despite indirectly owning 10-20 per cent of News Corp, received virtually nothing.
While the Murdoch sisters and their families – thanks to Rupert’s efforts -had become fabulously wealthy on paper on the value of their Cruden shares, most of the shares were locked up in trusts. By 1990, the next generation of Murdochs was creating pressure for change. But by that time there were other problems.
In 1987 Rupert Murdoch had faced his greatest challenge to his control of News, when he took over his father’s old company, The Herald and Weekly Times Group. News issued a swag of convertible notes to fund the takeover. When they converted in into ordinary shares, they would dilute Cruden’s 45 per cent stake in News down to 31 per cent.
Instead, Rupert ended up controlling 48.7 per cent of the diluted News share register, by winning control of the two largest holders of the notes, Queensland Press and an off-balance-sheet vehicle, Dexenne Pty Ltd.
The problem was that News Corp ended up funding a big chunk of the deals.
The plan worked as long as the News share price stayed high. But the plunge of the share price as News Corp’s debt crisis deepened during late-1990 threw the private companies into crisis – as the Queensland Press $500 million loan came up for refinancing.
By January 15 1991, when News shares hit their low of $3.19, the value of Kayarem’s News holdings was down to $13 million; Cruden held $237 million; Queensland Press after losing 95 per cent of its net value was worth $48 million; and Dexenne had negative assets of $170 million.
“It was only the Australian banks ( Westpac and Commonwealth ) that held the line, that insisted that Queensland Press be part of the debt agreement, that saved Murdoch,” said a senior banking executive involved in the debt override agreement by News Corp’s myriad bankers.
“The foreign banks didn’t see the need.”
For months Rupert Murdoch had been developing a proposal to buy the rest of the family out of Cruden.
That buy-out was based around a News share price of $13-$15 but News shares had fallen to $5.
According to one family friend who asked not to be identified, the family suffered some angst when it became clear Rupert now was offering to buy options on Cruden shares based on a News share price of $7 to $12.
Family members deny categorically any suggestion of ill-feeling or panic during the debt crisis.
“It just didn’t happen like that,” said one family member. “There was always absolute confidence in Rupert. The family’s always been slavishly supportive of him.”
Reports about the buy-out proposal are mixed, with some sources close to the family insisting it was canned. Others say that some family members took up the offer at the new lower price.
What is most telling, though, is Rupert’s subsequent need to raise large sums of money. What Cruden documents indicate is that some members of the family did sell out, probably in several stages. The numbers are in keeping with a sale based on a News share price of less than $12 (this is before this year’s three-for-one bonus issue. In pre-bonus terms, today’s share price is around $48).
Cruden has raised debt facilities of $125 million. Kayarem has retained its Cruden Investments shares, but all other family shareholdings have been placed in a new vehicle, Cruden Holdings, controlled by nominee companies associated with Mr Murdoch’s solicitors, Allan Allan and Hemsley, and Arthur Robinson and Hedderwicks, who are thought to act for other family members.
While the basis of the joint ownership is not known, Kayarem is described as the ultimate holding company. In addition, a block of Cruden Investments shares were acquired in exchange for Cruden Holdings redeemable preference shares.
Cruden Investments is selling regular parcels of News Corp shares to pay out the Cruden Holdings prefs, continuing to whittle away Rupert Murdoch’s control of News. The rate suggests a total cost for the prefs between $300 million and $370 million.
Consequently Mr Murdoch needs to find $400-500 million to pay out the prefs and the debt – and Cruden has little real income. Building another Queensland Press-style debt structure invites disaster.
Enter the super shares. Rupert could sell off enough ordinary shares to pay out the Cruden liabilities and the Queensland Newspapers debt, even float off the Australian newspaper interests, and all the time be certain that he will pass control of his media empire to his children.
Super shares are the ideal – the necessary – answer to the Murdoch dilemma
Rupert Murdoch has spent 40 years building towards this moment. Today he is one of the most powerful businessmen in the world. The family fortune, down to$280 million three years ago, now makes him one of the world’s 10 wealthiest tycoons.
He holds shares which are worth almost $8 billion. He holds net assets of$5.7 billion. He is poised on the brink of another exponential expansion. And without control of the empire, for Keith Rupert Murdoch it is not enough.
ROLE OF THE MYSTERY PARCEL
SIR Keith left his son Rupert with 28 per cent of the capital of Cruden Investments and 36 per cent of the voting rights – before Rupert started buying.
In 1986, Cruden’s accounts showed a substantial holding of Cruden shares broken out from the estate and settlement trusts which held the rest of the family’s shares, moved into a trust for Rupert.
It’s not clear why only the 1986 report shows these shares, but at the time Rupert was persuading the US Government that he and Cruden were US citizens, the Australian Government that at heart he would always call Down Under home, the Australian Broadcasting Tribunal that he was an Australian resident, and the Australian Taxation Office that he lived overseas.
The mystery holding appears to have been shares Rupert had bought from other members of the family. These left him controlling 43.4 per cent of Cruden’s capital, and 50.1 per cent of its voting shares.
In addition, in 1978-79 Cruden issued partly paid shares to Kayarem. In eight years Kayarem paid $1.75 million on the shares, before they were converted into fully paid shares in a Cruden restructure in 1987.
The parcel of partly paid shares finally gave Rupert a majority with 54 per cent of the capital and voting rights.
ASC PROBE INTO DEALS
THE Australian Securities Commission began a top-level inquiry into the Queensland Press deals (see graphic) in early 1991.
News Corp appeared to do badly out of the deals – the crippling debt meant Qld Press has never been able to pay News – though this year Qld Press is sitting on a capital profit from its News shares.
The ASC’s focus was whether one of the major purposes of Qld Press buying the News shares was to pay back Cruden debt, which would mean Qld Press was financing its own takeover, a breach of section 129(1)(c) of the Queensland Companies Act. The ASC was also concerned whether News had loaned the $170 million to help Qld Press acquire News shares.
A breach of Section 129(1)(c) would have enabled the ASC to seek to reverse the deals, which would probably have cost Mr Rupert Murdoch control of News Corp.
The ASC ruled against any legal action after concluding its inquiry in mid-1992, but supplied Cruden with a copy of what is believed to have been a highly critical draft report late last year.
THE DEBT TRAIL
DEAL 1 1987-88
1. Cruden Investments raises $590 million debt to buy 58 per cent (fully diluted) of Qld Press for $590 million.
News holds remaining 42 per cent, valued at $430 million.
Qld Press holds 28.3m News convertible notes
2. Qld Press borrows $170 million from News, $500 million from banks.
3. Qld Press pays $670 million to Cruden days after October 1987 Crash, wiping out its debt and interest, in return for 16 per cent stake in News Corp.
DEAL 2 1988
4. News loans $222.5 million to Dexenne, jointly owned by News and Qld Press, at 5.8 per cent interest.
5. Dexenne pays $232 million to News to buy 13.9 million News notes with 6 per cent yield. Notes sold in 1992.