Is Murdoch’s Empire ‘Living on Borrowed Time’? : Media: Critics say News Corp., the parent company of 20th Century Fox, is in a financial hole it can’t escape. Others predict the company is heading to better times.

Media baron Rupert Murdoch may have appeased his bankers last week by cutting News Corp.’s $7.6-billion debt with a $700-million stock sale. But to other observers his company’s finances remain as controversial as some of the shows aired on his Fox network.

News Corp.’s sale of nearly $2 billion in equity and assets over a two-year period ended in June only reduced its total debt by $600 million in that period, financial filings show. In addition, those sales have diluted the Murdoch family’s stake in the Australian media giant from 43% to 35%.

Critics contend that News Corp. is “burning cash” in its operations--which include the Fox network and 20th Century Fox, British and Australian newspapers, TV Guide and the half-owned British satellite TV service BSkyB--and will never dig out of its mammoth financial hole at this rate.

They include James Chanos, one of Wall Street’s best known short sellers. Chanos, who rose to prominence 10 years ago with his savvy indictment of Baldwin-United Corp., stands by a blistering report last year in which he argued that News Corp. is “living on borrowed time.”

“The ultimate proof of the ‘bear’ case here is that News Corp. keeps selling assets and securities and reporting big profit numbers, but the company’s debt barely goes down,” said Chanos, who has remained one of a tiny but stubborn group of investors shorting the stock.

Murdoch, however, also has plenty of supporters on Wall Street. Morgan Stanley and Oppenheimer & Co. have recommended the stock in recent months, respectively predicting that it could climb to $40 or $45, after trading in the $35 range recently. One reason is the performance of News Corp’s crown jewel--Fox Inc.

The Fox network has confounded its early skeptics by turning a profit--reportedly $52.7 million for fiscal 1992 alone. The fall and winter slate for 20th Century Fox also looks promising. “The Last of the Mohicans” has already taken in about $40 million, and the studio has two of the holiday season’s most anticipated films in the “Home Alone” sequel and “Hoffa.”

Murdoch now makes Los Angeles his base of operations. The 61-year-old executive has taken a hands-on role at Fox since the departure of former Fox Inc. Chairman Barry Diller earlier this year, going so far as to offer programming content tips on racier Fox shows, such as “Studs.”

Murdoch was in Australia last week and could not be reached for comment. But in recent interviews, he has alluded to plans to shift his focus from publishing to the electronic media. This month he sold the San Antonio Express News for $185 million, leaving just one U.S. newspaper in his empire. He continues to talk of expanding Fox’s TV prime time schedule to seven nights a week. Murdoch also hopes to build a global news operation capable of competing with Ted Turner’s hugely successful CNN.

On Friday, News Corp. reduced a $1-billion senior debt offering to $850 million, citing the market’s volatility.

“The bond market is still not as comfortable with the company as it might be,” said John Tinker, a managing director of the Furman Selz research and brokerage firm. “But in the long run this company is heading toward investment grade bonds again. Their financial difficulties are largely behind them. By replacing short-term bank debt with long-term maturities, raising equity and selectively divesting assets, they’ve done a tremendous job of pulling back from the brink of bankruptcy. It’s one of the all-time great turnarounds.”

News Corp. faced bankruptcy in the winter of 1990-91, when it had to admit that it couldn’t repay $2.3 billion coming due, and needed an extra $600 million to get through its fiscal year. Murdoch had been on an acquisition spree in the late 1980s, borrowing money from as many as 146 banks on four continents. When the liquidity crunch came, News Corp. was in a pickle. Ultimately, the banks provided the extra $600 million loan and delayed Murdoch’s repayment schedule.

Murdoch sold $900 million worth of assets that year, including “Seventeen” and “New York” magazines and the Daily Racing Form. But when the fiscal year ended on June 30, 1991, News Corp.’s balance sheet showed that borrowings had actually increased more than $100 million.

More asset sales and equity offerings had to follow to pay down debt. Last winter, the banks eased their requirement that News Corp. repay $6 billion by February, 1994, agreeing to wait until 1997 for $3 billion of that sum. With its latest bond and equity sales earmarked for debt reduction, News Corp. expects to refinance its bank debt or stretch out payments.

As of mid-September, the “short” position in News Corp. shares was 4.8 million shares--less than 3% of the American Depositary Shares trading on the New York Stock Exchange. (Each ADS represents two ordinary shares of the Australian-based company.)

Short sellers borrow shares to sell, hoping to replace the stock at lower prices. They’ve had tough sledding with News Corp., however, because its price has climbed from $5.38 during the worst of its fiscal crisis, to as high as $36.63 this year.

“The shorts are getting crucified. By the time this is all over, Mr. Chanos is going to lose tens of millions,” predicted one money manager, who asked not to be identified.

But Chanos is not alone. The Tiger Fund, run by a shrewd Southerner named Julian Robertson, apparently still holds a short position in the News Corp. stock. And not all of the critics are shortsellers.

Irving Kellogg, an accountant and lawyer who has not invested in News Corp., faults the company for its murky finances. “The information that they give ADS holders is virtually useless because it doesn’t give you the details underneath the glowing figures,” said Kellogg, who co-authored “Fraud, Window Dressing and Negligence in Financial Statements,” a two-volume text published by McGraw Hill last year.

After reviewing the company’s recent prospectus and Australian annual reports, Kellogg made several observations about the fiscal year ended June 30, 1992. “From their operations, they generated about $383 million in cash and they needed $459 million to conduct their business properly,” Kellogg said, adding up the dividends, capital expenditures and leasing and financing costs.

Kellogg also cast a critical eye at non-current inventories that totaled nearly $1.3 billion. “That’s subject to discretionary write-off, amortization or valuation by the directors, or in reality, the chief executive officer,” he said.

But the short sellers complain that few investors have been willing to invest time studying the complex financial statements.

“Everybody thinks Rupert Murdoch is such a visionary and he’s pulled this out of the fire, when the fact is two kids--Macaulay Culkin (of “Home Alone”) and Bart Simpson--saved this far-flung, out of control company from going bust,” said one short seller who asked not to be identified. “Without the allure of Fox, no one would have believed the investment spending rationale which was a foil to hide operating losses.”

But Wall Street has largely dismissed such criticisms.

Indeed, Murdoch could soon be on the prowl for new business opportunities, if News Corp. shakes off the restrictions imposed by the banks two years ago, as some analysts expect.

“I don’t think he’s going to go back to making acquisitions for awhile,” said Tinker at Furman Selz. “The question is how he’s going to take individual parts of the entertainment empire--i.e. Fox in the United States, and BSkyB in England--and fully integrate it, and at what cost.”