Murdoch joins Virgn Mile High Club Tuesday, January 29, 2008

It seems BSkyB has been screwed by the UK Government order that it cuts it's 17.9% stake in ITV to less than 7.5%. This comes only a week after Labour supporter Richard Branson, a British tax exile, flew to China with Gordon Brown (British Prime Minister) and whose Virgin Group had been frustrated in his attempt to buy ITV.

The grounds cited were that the stake resulted in a substantial lessening of competition within the UK market for all television. It also enforced a ruling from the Competition Commission last month.

Two specific points of interest. Firstly, the ruling that 17.9% constitutes a "merger", rather than an investment stake, which accounting rules traditionally consider it and which would have considerably ramifications if applied more widely. Secondly, ITV shares have almost halved in value since they were acquired by BSkyB and could be driven lower by an enforced sale, so they may have a reasonable claim for sizeable damages.

As it happens, since that same trip the Government have also announced an astoundingly generous offer to guarantee bonds issued by Northern Rock, which Virgin wants to buy. So perhaps Murdoch isn't the only one who was screwed on the flight.

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posted by John Wilson @ 8:04 AM Permanent Link ,

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Does Murdoch have shares in Facebook? Thursday, June 21, 2007

The Times ran a story yesterday that Murdoch is offering MySpace to Yahoo in exchange for 25% of Yahoo. This would put a valuation of $12bn+ on MySpace at current prices, not bad for a company bought in Summer 2005 for $580m.

The general consensus is that Yahoo would be mad to accept the deal at such a crazy valuation. But more interesting is how such a proposed price makes an alternate purchase i.e. Facebook, look such a steal at say anything less than $3-4bn. I've blogged in the past about how by introducing a competing item at a crazy price can influence choice.

So, let's assume I was sitting in Yahoo HQ. I might now conclude that I should go buy Facebook, as this will be a better deal than accepting Murdoch's terms. Why, Murdoch has already commented that he is worried about Facebook growth affecting his portfolio.

However, Murdoch is not stupid and you can see how he might win in many ways here

- They accept his offer and acquire MySpace for $12bn. RESULT. What a return on investment.

- They reject his approach and buy Facebook. Great, coz he just forced them to probably pay more than they needed by putting an overly high valuation on MySpace that upped Facebook's perceived "value". Moreover, the price Yahoo pays re-enforces the value of MySpace i.e. if Facebook sells for $3bn, then MySpace must be worth more, and so must Murdoch in turn!

But an additional cunning plan might be that he has persuaded an investment bank to sell him a synthetic long position on Facebook's value or, better yet, a synthetic pairs trade with a long position in Facebook and a short position on Yahoo. Such a deal would give him a payoff if the value of Facebook went up and the value of Yahoo declined. Consider how he could do this:

- Buying an interest in Facebook. An exising holder could "sell" their interest in Facebook at a pre-agreed price (call it $2bn equivalent price, which would have appeared to be a good price a week ago) thereby locking in the price they will receive. Murdoch "buys" at $2bn and keeps any upside above this, when it eventually sells. Putting this trade on ahead ahead of his manoeuvres this week would create an impressive profit.

- Selling an interest in Yahoo. Yahoo is a quoted stock, so getting a short position would be straight forward enough either through the options market or selling and then borrowing the shares. He clearly only profits if the price falls. It might do so if Yahoo buys Facebook at a price considered over the odds. It seems certain to fall if they accept the MySpace deal. In this latter case, if Murdoch took the 25% of the company shares and they fell in value, these would cover his short position and crystalise his short. As it happens, Yahoo could even look bad if they do nothing and see their stock price fall!

Has he really done this? Probably not and if he had it might be questioned whether he was insider trading. But what a strategy!

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