Bloomberg News

Murdoch’s Deal Disrupted by Australia Crushes Austar: Real M&A

July 27, 2011

July 27 (Bloomberg) -- Rupert Murdoch’s recent setback in Australia is giving investors the chance to make the largest profit on any pending acquisition in the world.

Foxtel, backed by Murdoch’s News Corp., is facing delays in its A$1.9 billion ($2.1 billion) takeover of Sydney-based Austar United Communications Ltd. as antitrust regulators warn that the combination of Australia’s biggest pay-television operators may “substantially” reduce competition. The A$1.52-a-share purchase agreement is 45 percent higher than Austar’s closing price yesterday after the shares slid 19 percent in three days. That’s the largest premium of any pending deal greater than $500 million globally, according to data compiled by Bloomberg.

The Australian regulator pushed back its ruling the week after a phone-hacking crisis forced News Corp. to drop a bid for pay-TV provider British Sky Broadcasting Group Plc. While Austar, controlled by John Malone’s Liberty Global Inc., is now trading as if there’s no deal, the acquisition still has a 25 percent likelihood of winning approval, according to JPMorgan Chase & Co. and White Funds Management Pty.

“The deal is not dead,” Gregory Lafitte, head of Asian merger arbitrage at Louis Capital Markets in Hong Kong, said in a telephone interview. “We’ve already lost the premium so the risk of seeing the stock lower is quite low.”

Anyone who buys the stock now “could earn a great return,” he said. Austar rose as much as 1.9 percent in Sydney trading today before closing up 1.4 percent, its biggest gain in two weeks, at A$1.06.

The press office for the Australian Competition & Consumer Commission, the nation’s competition watchdog, declined to comment on the deal review.

Foxtel Remains Confident

Ilse Schache, a spokeswoman for Austar at media relations firm Financial Dynamics, declined to comment beyond the company’s July 22 statement. Austar said it “will continue to work with the ACCC to resolve issues identified” and “remains committed to effecting the transaction.”

Adam Suckling, a spokesman for Foxtel, declined to comment beyond the company’s separate statement the same day.

“Foxtel remains confident that the proposed transaction does not substantially lessen competition in any market,” Chief Executive Officer Kim Williams said in the statement. “Foxtel will respond to the ACCC as part of its ongoing process.”

Foxtel, Australia’s largest pay-TV operator, announced May 26 a proposal to pay a 22 percent premium to Austar’s prior 20- day trading average, data compiled by Bloomberg show. The purchase would help Foxtel, which focuses on metropolitan areas, expand in rural locations.

‘Near Monopoly’

Malone’s Liberty Global owns 54 percent of Austar. Sydney- based Foxtel is half owned by Telstra Corp., Australia’s largest phone carrier. News Corp. and James Packer’s Consolidated Media Holdings Ltd. each own 25 percent.

The combination of Foxtel and Austar would “create a near monopoly,” the ACCC said in a statement on its website July 22. The competition regulator’s final decision, which was originally due July 21, has been pushed back to Sept. 8 as it seeks more information and additional public comments.

There is no connection to News Corp.’s phone-hacking issues in the U.K., ACCC Chairman Graeme Samuel, who will retire July 31, said in a phone interview last week.

Before today, Austar had fallen 25 cents, or 19 percent, to A$1.05 since the regulator’s statement, the lowest closing price since Feb. 18, according to data compiled by Bloomberg.

“The ACCC was pretty firm,” Angus Gluskie, who manages about $350 million at White Funds Management in Sydney, including shares of Consolidated Media and Telstra, said in a phone interview. “They think that it prevents competition. Given that that’s the core of their concerns, it’s very hard for Foxtel to say that doing the combination leaves sufficient competition there.”

‘Buying Opportunity’

There’s still a 25 percent chance that the deal succeeds in its current form, Gluskie said. Laurent Horrut, an analyst with JPMorgan in Sydney, also pegs the likelihood at 25 percent, down from 50 percent, according to a July 22 research note.

Buying the stock now could hand investors a return of more than 43 percent if the deal closes. The stock closed at A$1.13 on March 1, the day before the company disclosed that Foxtel was in talks with Englewood, Colorado-based Liberty Global to buy Austar.

“The stock is back to pretty much where it was before they had the deal,” David Joyce, a New York-based media analyst at Miller Tabak & Co., said in a phone interview. “It has created a sort of buying opportunity. There’s still plenty of time for them to get the deal done.”

Dominique d’Avrincourt, a Melbourne-based analyst at Commonwealth Bank of Australia, said there’s “zero probability” of the deal closing.

Seven Group

“We just don’t see it happening,” d’Avrincourt said in a phone interview. “The market is telling you now that this stock is back to fundamentals.”

If the Foxtel deal collapses, other bidders in the Asia- Pacific region may emerge, said Miller Tabak’s Joyce. He declined to name potential buyers. Seven Group Holdings Ltd. of Sydney may bid if Foxtel is blocked, the Australian Financial Review said July 25.

While Seven Group would be a “logical” buyer, it may face similar regulatory scrutiny, Matthew Harrigan, an analyst at Wunderlich Securities Inc. in Denver, said in a phone interview.

Foxtel is facing a roadblock after New York-based News Corp. this month shut down the News of the World publication amid phone-hacking revelations, including tapping into the voicemail of a murdered schoolgirl. Three days after the tabloid published its last edition July 10, News Corp. was also forced to scrap a 7.8 billion-pound ($12.8 billion) bid for pay-TV provider BSkyB.

‘Sensitivity on Murdoch’

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

News Corp. Chairman and CEO Murdoch, 80, got his start in 1953 when he inherited a daily newspaper in Adelaide, Australia. He owns about 146 metropolitan, regional and rural newspapers in the country, according to the company’s 2010 annual report.

“Even though they said point blank that it has nothing to do with Murdoch, there is some sensitivity on Murdoch,” Wunderlich’s Harrigan said of the ACCC’s review of the Foxtel- Austar deal. “Murdoch is really on the periphery in terms of his involvement, but maybe at the margin this is enough to tip it.”

Teri Everett, a spokeswoman for News Corp., declined to comment on the prospects for Foxtel’s bid for Austar and the regulatory review.

Austar has fallen so far that there’s little risk in buying the shares now, Louis Capital’s Lafitte said.

“Most investors had expected the regulator to give the deal a green light but some concerns are still to be raised,” Lafitte said in an e-mail. “The downside is currently quite limited. The upside is quite high.”

--With assistance from Mohammed Hadi in Hong Kong and Robert Fenner in Melbourne. Editors: Sarah Rabil, Michael Tsang

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net.

To contact the editors responsible for this story: Katherine Snyder at ksnyder@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net.


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