Author: Rocco Huang
Covestor model: Tortoise and the Hare
Disclosure: Long NWSA, VIAB
Tortoise Stock continues to invest in the non-voting stocks of Viacom (VIAB) and News Corporation (NWSA). Of course, I am troubled by the corporate governance issues related to their dual-class share structure, in particular with News Corporation. However, investing is all about trade-offs. In this case, it is about how much we are willing to pay for the voting rights, or how much compensation we demand to part with the voting rights.
Currently, I believe that the corporate governance issues are a reasonable price to pay for the potential economic benefits.
First of all, in both companies, the non-voting stocks are traded at a discount to the voting stocks, and I like bargains. Secondly, as I explain in “The good and the bad of having a controlling shareholder,” Wal-Mart, Viacom, News Corp, etc. are considered “creeping LBOs” in the sense that these companies are generating so much free cash flow year after year, and the controlling shareholders already have gathered so many chips in their hands, that within a decade, through share buybacks and dividends payouts, they are all capable of cancelling all shares outstanding in public hands and taking the companies private.
However, things can change, and I am constantly evaluating my options. In particular, I am getting increasingly interested in News Corp’s voting stock (NWS), as it is now only about 2-3% more expensive than the non-voting stocks (NWSA), and more importantly because I am seeing some near-term catalysts that may increase the value of the voting rights and hence the voting stock premium (i.e., the price differential between NWS and NWSA).
The voting rights may not be valuable in my own hands, since I am so small an investor. The value of the voting rights really depends on how much they are potentially worth in the hands of those who are eager to build up large, voting positions. As an investor for financial gains, I don’t care whether demand comes from the Murdoch family increasing its stake to tighten control, or from other large investors gathering ballot papers to wrestle control away from the family. In fact, the more competition, the more drama, the better.
People are willing to pay a dear price for power and control. In 2006, John Malone’s Liberty Media exchanged its 16.3% stake in News Corp (about half of which was a voting position) for News Corp’s crown jewel DirecTV. The transaction resulted in the Murdoch family’s tighter control of News Corp, but also possibly a value loss for its non-Murdoch-family shareholders since the price paid in a ransom deal was unlikely to be fair from a financial perspective.
