MySpace turns News Corp. stock toxic as investors shun Murdoch

April 21, 2008

Rupert Murdoch’s effort to turn his $580 million MySpace purchase into an advertising powerhouse has turned News Corp. into a toxic stock.Analyst Michael Nathanson at Sanford C. Bernstein & Co. cut his price estimate on New York-based News Corp., the media company Murdoch controls, by 13 percent last week to $21, and UBS AG’s Michael Morris cut his target by $1 to $25. They acted after Fox Interactive Media – including MySpace, the biggest social- networking site – said it would miss its 2008 goal of $1 billion in revenue, or 3 percent of News Corp.Õs projected sales.

Murdoch, 77, is pouring resources into MySpace to expand into South Korea and India, add music downloads and target users with promotions. As a result, Fox Interactive’s costs will jump 46 percent this year, almost as much as revenue, risking long- term profit growth, Nathanson said in an April 14 report. Marketers are reluctant to place ads next to user-generated content and News Corp. no longer warrants the 20 percent premium to the earnings multiple of the Standard & Poor’s 500 Index he previously imputed in estimates, he said.

“When you have such a powerful asset as MySpace and you can’t successfully monetize it, that’s a problem for investors,” said Daniel Poole, assistant research director at National City Corp., which manages $34 billion in Cleveland. He said he doesn’t plan to add to the 18,000 News Corp. shares he oversees. “It’s hard to argue for multiple expansion when you have that many visitors and you’re not making the amount of money you thought.”

News Corp. Class A shares plunged the most in five years the day Nathanson and Morris cut their estimates. The stock, down 9.6 percent this year, rose 44 cents to $18.52 on April 18 in New York Stock Exchange composite trading.

The company’s bond spreads over yields on comparable U.S. Treasury obligations have widened as the shares have fallen.

News Corp.’s 6.2 percent bonds due in 2034 rose 0.4 cents April 18 to 93.4 cents on the dollar and yield 6.73 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. On April 3, before Fox Interactive said it would miss its sales goal, the bonds yielded 6.52 percent.

MySpace’s audience as of February was 107.7 million users, little changed since March 2007, while second-place Facebook Inc. tripled to 100.3 million, according to Comscore Inc. News Corp. bought MySpace in 2005.

Marketers “don’t know what their brands will be placed next to,Ó”said Paul Greene, an analyst at T.Rowe Price Associates Inc. in Baltimore, which owns more than 7.3 million News Corp. shares among $400 billion in assets.

The site’s three-year, $900 million advertising commitment from Google Inc. ends in 2010. Mountain View, Calif.-based Google, owner of the most-popular search engine, said last week that ad spending on MySpace was improving, after calling it disappointing in January. Closely held Facebook, based in Palo Alto, Calif., doesn’t disclose revenue.

Nathanson projects sales at Fox Interactive will increase 64 percent to $904 million in the fiscal year that ends in June. His previous forecast was $955 million. Morris lowered his estimates for this year and 2010 by 8.7 percent each to $917 million and $1.26 billion.

Fox Interactive replaced Chief Revenue Officer Michael Barrett and formed a new unit to sell ads on MySpace and other sites. The group will be able to target users by demographics, interests and hobbies to boost revenue, Fox Interactive President Peter Levinsohn said in an April 9 interview.

“They haven’t been able to shift the pricing up as quickly as they’d hoped,” said Jeff Lanctot, a senior vice president at ad agency Avenue A/Razorfish in Seattle. “Some of their targeting they do, they’ve fallen a little bit short.”

MySpace has sites in 27 countries and this month forged a deal with record labels to share revenue from sponsorships and concerts. Half of revenue may come from outside the U.S. in five years, Chief Executive Officer Chris DeWolfe said.

“We are very pleased with how the monetization on MySpace is going,” Levinsohn said in the interview at his Beverly Hills office. “We continue to make improvements and strengthen our sales force.”

Nathanson is one of four analysts who suggest investors hold News Corp. shares, while 17 say to buy. The company reports fiscal third-quarter earnings results on May 7.

Fox Interactive is one of three News Corp. units that are projected to provide 89 percent of the increase in operating income through 2012, Nathanson estimates. The other two are the company’s cable networks and Sky Italia, a satellite broadcaster.

Murdoch has sought to partner with Microsoft to bid for Yahoo! Inc., said David Bank, an analyst at RBC Capital Markets. Earlier, Murdoch discussed a partnership that would help Yahoo, Google’s smaller rival, to fend off Microsoft.

Finding other possible buyers – Google, Time Warner Inc.’s AOL or Barry Diller’s IAC/InterActiveCorp – would make sense if Murdoch could get $3 billion to $4 billion, said Chris Marangi, a fund manager at Gamco Investors Inc in Rye, New York, owner of more than 14 million News Corp. shares.

“They’ve got to balance the future growth of News Corp. versus the certainty of getting the price for it today,” Marangi said. “I don’t think there’s a rush to offload it at this point.”

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