News Corp. Stock Is Reeling Over New Spending Spree

Investors remember all too vividly 1990, when Rupert Murdoch’s wild spending spree almost buried News Corp. under a pile of debt. Now worries that the media maverick may be careening down the same path again--or at least is taking on more than he can chew--is creating havoc with News Corp.’s stock.

Murdoch has had an extraordinarily busy six months, starting up a cable news channel, acquiring additional sports rights for regional networks and digesting the $2.5-billion purchase of New World Communications. The period has been capped by a series of real or rumored deals in recent weeks, including a $1-billion merger with EchoStar Communications Corp. and the $1.3-billion purchase of Heritage Media Corp.

“He has been doing a $500-million to a $1-billion acquisition a week for the last four weeks,” said Bishop Cheen, an analyst at First Union Capital Markets. Noting that only two of the deals have been announced, Cheen added, “Even rumors take on the illusion of reality when investors are nervous.”

Jitters on Wall Street sent News Corp. stock to a 52-week low Thursday, to $18.375 a share.

Comparisons to 1990 may be a stretch. Analysts say News Corp. has plenty of cash on its balance sheet--about $1.9 billion after completing the New World Communications purchase in January. And Cheen says it throws off $1 billion a year in free cash flow, making it a virtual cash machine.

News Corp. spokesman James Platt offered no explanation for the stock drop. He suggested that the market is reacting to rumors and said the company cannot comment on speculation.

But many investors worry about the capital requirements of expanding cable channels and building a satellite broadcast system. Some say the company is spending too aggressively on non-core assets at a time when News Corp.’s main broadcasting and media business requires attention.

Said Cheen: “The stock is taking a beating because of the company’s acquisitiveness, distractions from its legal battles with Time Warner, the floundering of the Fox News Channel and the transition of Fox Broadcasting as it digests the New World stations.”

Last fall, the company launched the Fox News Channel, paying cable operators an estimated $200 million to carry the service to about 20 million homes. Despite the lucrative payments, the channel trails rival upstart MSNBC, which says it reaches 35 million homes.

And analysts say News Corp. will have to spend millions more to expand coverage and distinguish the channel from competitors. Cheen gives the channel a 50% chance of survival. Many cable operators have refused to carry it because of News Corp.’s threats to bury the cable industry with its new Sky satellite service.

At the same time, News Corp. is trying to mount a challenge to the wildly successful children’s channel, Nickelodeon, owned by Viacom. The company has been in negotiations over the last several months to buy International Family Entertainment, hoping to use its Family Channel as a vehicle for the Fox Children’s Network, which now airs weekdays and Saturday mornings on the Fox broadcast network. Analysts estimate that such a buyout could cost News Corp. $600 million or more.

Fox sources say the company also is in negotiations to buy out Liberty Media’s 50% interest in their Fox Sports joint venture, which is trying to launch a challenger to Disney’s ESPN by linking a group of regional sports networks. The two companies merged their sports interests in 1995, though sources say the partners have had philosophical clashes from the start. Fox sees Liberty as a penny pincher that is blocking its aggressive expansion into sports.

Fox worries that Liberty could object to putting its sports programming on Sky because Liberty’s parent, Tele-Communications Inc., is the nation’s largest cable operator. Liberty may be under pressure to sell the sports interest to help relieve TCI’s crippling debt problems.

Analysts estimate News Corp. would have to pony up $1 billion or more for Liberty’s share.

Meanwhile, sources say News Corp. is eager to buy a stake from Cablevision Systems in Madison Square Garden to add to its regional sports operation. News Corp. desperately needs the Garden’s regional sports network in the nation’s top advertising market to offer advertisers national reach.

Many investors are looking ahead to the enormous investment required for News Corp. to build its Sky satellite television service. News Corp. announced the merger last month of its ASkyB satellite venture with EchoStar Communications Corp. Analysts believe the partners will have to spend $3.5 billion or more to build a meaningful competitor to industry leader, DirecTV, and to counter regulatory and technical hurdles.

In addition to the Sky venture, News Corp.’s agreement last week to buy Heritage Media makes many investors nervous. Although some analysts applaud the deal because of the strong cash flow Heritage will bring, some shareholders worry that News Corp. is spending its money on the wrong things, buying assets that do little to bolster its broadcasting and media core. Heritage is a direct-marketing and coupon business.

Moreover, some analysts believe News Corp. is paying more for Heritage than it appears by making the purchase with undervalued preferred stock.

Last week, analysts became alarmed at reports that News Corp. was negotiating to buy PointCast, which developed a program that gathers information from the Internet, for $400 million. But sources say those talks are dead.

As if all this weren’t enough, in addition to domestic cash demands, Murdoch is launching JSkyB and Sky Latino and is still losing a reported $100 million a year on Asia’s Star TV. His nearly $7 billion in debt is a tangled mess, according to one analyst, composed of more than 70 pieces.

Yet few analysts are ready to bet against Murdoch, who has a history of overspending and then proving critics wrong.

“Entrepreneurs like Murdoch like to go to the brink with their companies,” said Mario Gabelli, who owns News Corp. shares in his family of mutual funds.

Said Cheen: “More people have made money with him than have made money betting against him. Let’s see if he has the magic he always has had that has saved him when his back was against the wall.”