A $3 Billion Gamble

By Christine Gorman

Can two magazines and a daily racing-tip sheet be worth billions of dollars? Maybe so, if the buyer is Keith Rupert Murdoch. Last week the Australian-born press baron agreed to buy Triangle Publications, which puts out TV Guide (circ. 17.1 million), the Daily Racing Form (123,000) and Seventeen (1.9 million), from Walter Annenberg, the California businessman and philanthropist, for $3 billion. While TV Guide may be the undisputed king of television listings and boast the largest circulation of any U.S. magazine, media experts concur that Murdoch is paying a premium price that will add to his already considerable debt load. But Murdoch, 57, has been a gambler since his teenage days, when he bet on cards and horses. And no one disputes that he has a keen eye for value. Says Peter Diamandis, a former publisher of New York magazine: "Murdoch continues to pay top dollar and succeed, so he must know something that we don't know."

The acquisition will bring Murdoch and his Sydney-based News Corp. one step closer to his goal of developing the most powerful communications empire in the world. After the deal is completed, the U.S. circulation of Murdoch's magazines, which include New York and New Woman, will total some 25 million. That will put News Corp. at roughly the same level as Time Inc., the largest U.S. magazine publisher.

Magazines, however, are but one of the pillars that support Murdoch's far- flung realm. The others: newspapers, books, films and television. Murdoch controls more than 60% of metropolitan newspaper circulation in Australia and 36% of the national distribution in Britain. Although he built his company primarily on racy tabloids and conservative politics, Murdoch also publishes the venerable Times and Sunday Times in London and the well-respected Australian, and he is part owner of the South China Morning Post in Hong Kong. While he has sold the New York Post and the Chicago Sun-Times, he still owns the Boston Herald and the San Antonio Express-News. He has interests in ten book publishers, including Glasgow's William Collins & Sons and New York City's Harper & Row. His 20th Century Fox movie studio and six independent TV stations in the U.S. have served as the launching pad for his new Fox Television network. In Europe his Sky Channel, a satellite broadcasting service for cable-TV viewers, reaches 13.3 million homes in 22 countries.

In the wake of Murdoch's latest move, some media analysts warn of a potential conflict-of-interest problem: TV Guide, after all, will be reviewing Fox Television shows. "TV Guide is the dominant medium for program promotion," argues Andrew Jay Schwartzman, executive director of the Media Access Project, a Washington-based public-interest law firm. "The potential for abuse is considerable."

* Most experts, however, argue that Murdoch is far too astute a businessman to tamper with TV Guide's winning formula. The moment competing networks suspected that they were not getting equal treatment in TV Guide, they would almost certainly pull their advertising. If anything, says Barry Diller, Fox's chief executive, the fledgling network will operate at a slight disadvantage. "A magazine has to retain its credibility, or it's lost," he maintains. "The natural instinct of the people operating TV Guide will be to bend over backward to ensure that there's no appearance of favoritism."

Murdoch's holdings may sprawl over four continents, but there is a clear pattern. "Everything is English-language related, global related and media related," says John J. Veronis, head of Veronis, Suhler & Associates, the investment-banking firm that brokered the Triangle deal. Adds Investment Banker Steven Rattner of Morgan Stanley: "Other U.S. media are exporting their products, but Murdoch is the only one buying indigenous communication systems and linking them together."

The potential advantages of such linkages are myriad. For example, Fox controls a large film library, including such hits as Cocoon and Aliens, as well as the syndication rights to such favorite TV shows as L.A. Law and M*A*S*H. If Murdoch's satellite network goes global, he could broadcast movies and reruns to markets as far apart as Memphis and Melbourne. And then, if he combined TV Guide's circulation in the U.S. with that of his TV Week in Australia, he could offer advertisers access to a much larger market for less money. In buying TV Guide, Murdoch has also purchased thousands of computerized capsule reviews, which would greatly simplify starting up a similar European guide.

No one is betting against Murdoch's global vision because the media magnate controls such an effective power base. News Corp. earned $560 million on $3.5 billion in revenues in 1987. Yet Murdoch can run the huge corporation like a family firm because he and his relatives own half its shares. And that is not going to change anytime soon. News Corp. has issued very few new shares since 1954. Besides, with no more than 40 corporate staffers, News Corp. is so lean that Murdoch can strike his targets quickly. He and Annenberg first talked about a deal over lunch at the Triangle publisher's home on July 9; they announced their agreement less than four weeks later.

Murdoch is no absentee press lord. His home is now New York City, but he spends much of his time traveling among his far-flung operations. While he may rely on his two chief lieutenants, Richard Sarazen and Martin Singerman, for handling financial matters and administrative details, the one in charge is Murdoch. Says Investment Banker Veronis of the Triangle deal: "At our first meeting, he carefully picked up each publication, and we talked about the content and the market that the publication reached. There are very few people who are editorially astute and who have a penchant to learn about business. Murdoch is the best."

Even Murdoch, however, must turn to others for help in buying magazines and TV stations. Because he refuses to raise capital by issuing enough shares to dilute his control of News Corp., Murdoch finances most of his acquisitions through the sale of assets and by borrowing. The company's current debt is $4.7 billion, and annual interest payments amount to more than $600 million. But Murdoch's publishing ventures generate a large enough cash flow -- $1.2 billion last year -- to cover the interest payments. Murdoch was one of the first to recognize that media companies, which are traditionally asset poor but cash rich, have been tremendously undervalued by the market, observes Analyst Tony Pennie of James Capel, a London-based investment firm. Says he: "That's why Murdoch often pays prices that would frighten other people."

Still, the Triangle purchase will not be easy. Concerned about the ability of News Corp. to repay debt if an economic downturn hits, Murdoch's creditors have so far promised to loan him only half the $3 billion needed. Of the remaining $1.5 billion, some $320 million will come from the sale of an office building in Los Angeles and $200 million from undeveloped real estate. Also, Murdoch has announced plans to raise up to $200 million by selling his 6.8% voting share in Reuters, the international information service. Under Reuters' bylaws, however, he cannot do so without the permission of the news wire's other major stockholders, many of whom are Murdoch's British newspaper rivals. Even if he clears that obstacle, he will still be looking for nearly $800 million in cash.

While Murdoch works to raise the money, he faces difficulties in several established parts of his empire. In Britain, the Times's efforts to break the 500,000-circulation barrier have been frustrated by its rival the Independent, a popular newcomer to London's quality-newspaper market that is selling 378,000 copies a day. Murdoch's middle-market tabloid Today has grown by 33% since he acquired it in 1987 but has not gained much ground against larger, more established competitors, such as the Daily Mail and the Daily Express. Although Murdoch owns a 20.5% stake in Pearson, the British publisher of the Financial Times, he has reportedly proved unsuccessful in persuading the company to form a joint venture with him to compete more directly with the Wall Street Journal.

Far more serious are the growing pains in the television arm of News Corp. The Fox network posted an $85 million loss last year, $40 million more than anticipated. Some programs, such as The Tracy Ullman Show and 21 Jump Street, have received critical acclaim, but others, like A Current Affair, which reports sensational news, amount to tabloid TV. So far, Fox has captured no more than 4% of the U.S. television audience, vs. an average of about 20% for each of the three established networks. In Europe, News Corp. expects at least $200 million in losses from Sky Channel next year.

For all the challenges Murdoch faces, few media experts believe he is anywhere near his Waterloo. "He's backed around the world by some very good assets and by very good cash flow," Analyst Pennie points out. Furthermore, payments on at least 70% of his debt are either fixed or capped, so that if interest rates go up, as expected, his loan costs will not increase proportionately. Says Pennie: "He comes across very much as a high roller, but the risks are very calculated."

Where will Murdoch go next? Insiders say he keeps a wish list of some 25 companies that he would like to acquire. Although it will take time to digest Triangle, Ken Noble, a media analyst at Paine Webber, thinks Murdoch might have his eye on firms in Canada, with which he has few ties. Numerous U.S. publishers, however, remain on "Rupert alert," cutting costs and laying off employees. The day of the global media empire is coming, says Allen Neuharth, chairman of the Gannett newspaper chain, "and Murdoch is well positioned." The most successful gamblers know when to quit. But that day seems unlikely to dawn anytime soon for Rupert Murdoch.

CHART: NOT AVAILABLE

CREDIT: NO CREDIT

CAPTION: EXPANDING EMPIRE

DESCRIPTION: Value of business holdings of Rupert Murdoch.

With reporting by Peter Shaw/London and Martha Smilgis/New York