The hidden message in Rupert Murdoch’s latest manoeuvre

Rupert Murdoch has a long history of wrong-footing his rivals with unexpected business manoeuvres. With some notable exceptions (he famously blew billions on embryonic social media platform MySpace), the 91-year-old entrepreneur is a master corporate tactician with a track record of deftly timing the markets.

That’s why his latest unexpected move - to explore the reunification of News Corp and Fox Corp, the two companies he tore apart less than a decade ago - warrants scrutiny.

Even though it has been talked about for years, the announcement late last week that News Corp and Fox Corp are exploring a tie-up has raised more than a few eyebrows on Wall Street.

“This is not exactly how we envisioned the Fox endgame playing out,” wrote analysts at research firm Moffett Nathanson. “[W]e do not believe Fox investors will be happy with this outcome as currently announced.”

Rupert Murdoch with Lachlan; after a falling out with his father in 2005, Lachlan – Rupert’s eldest son and heir apparent – returned to the family company 10 years later.Credit: Getty Images

Back in 2013, when Murdoch decided to split his multibillion-dollar corporate empire, News Corp was reeling from a phone hacking scandal at its UK tabloids and the print media business globally was deeply challenged. News Corp’s exposure to print was dragging down its overall valuation and weighing on its fast-growing US film and television assets.

A lot has changed since then for both the Murdochs and the broader media business. Newspaper companies that have transformed their operations through digital subscriptions are no longer unloved by the market. And the Murdoch line of succession is settled with the eldest son Lachlan now firmly in charge, after the acrimonious departure of younger brother James.

The two Murdoch businesses that have emerged over the ensuing period are also very different to what they were nine years ago. News Corp still owns a vast array of global and local newspapers (including The Wall Street Journal, The Times and The Australian) but now makes most of its money from digital real estate advertising.

Fox Corp is also a different beast. Murdoch famously sold his entertainment assets to Disney for $80 billion, a top-of-the-market deal now considered a masterstroke. It was timed just before Netflix and streaming shattered the economics of Hollywood. Fox Corp is now focused on live news - it owns the top-rated US cable channel Fox News - and live sport (and the adjacent, booming business of US sports betting).

Combining a US television company focused on live sport and live news with a digital real estate and news business makes some strategic sense. There is the potential for greater cross-promotion across more media platforms and also cost savings at the corporate level.

What’s less immediately clear is how the reunification would solve the company’s biggest challenge, at least from the perspective of investors. Analysts lament that both News Corp and Fox Corp suffer from valuation discounts relative to their media industry peers.

This discount may at least in part be attributed to the unpredictability of Murdoch’s deal-making. Barclays analysts say “the propensity of Fox management to pursue unrelated assets” is one of the factors dragging down that stock. As such, the unexpected move to reunify the two businesses may actually worsen the problem.

It remains to be seen whether investors give Murdoch the benefit of the doubt on this issue. For their part, both Barclays and Moffett Nathanson doubt it.

Yet, it is another potential benefit of a combined News and Fox that should give investors pause for thought. Barclays theorises that combining the two companies might “be intended to position the two companies more defensively to prepare for a potentially tough cyclical and structural growth environment”.

In other words, is Murdoch predicting even tougher times ahead for the global economy, and/or for the media industry which is heavily leveraged to it?

Given his track record with previous deals - which on balance involve more Disney hits than MySpace misses - it cannot be ruled out.

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