Missing from Murdoch's family deals: News Corp. shareholders

February 24, 2011: 9:35 AM ET

All-in-the-family deal-making just isn't right for a public company.

Elisabeth and Rupert Murdoch, family dealmakers.

Elisabeth and Rupert Murdoch, family dealmakers.

The Murdoch family owns only about 12% of News Corp., but Rupert Murdoch sure runs the place like a wholly-owned family candy store. The company, blurring the distinction between public and family business, makes deals with family members, using shareholder money to get them into the corporate fold.

The most recent example is the $675 million deal for News to buy Shine Group, a London-based TV production company majority-owned by Murdoch's daughter, Elisabeth. As part of the deal, she'll go on News Corp.'s board. In other words, News is buying Elisabeth, not just her company.

Once at News Corp., she'll be competing with two board members, her brothers, James and Lachlan, to become the next leader of News Corp. (NWS), the world's biggest and most influential media company. Its properties include the Fox networks, the Wall Street Journal, BSkyB, and the New York Post.

James has been at News Corp. since 1996, when the company bought an 80% stake in his start-up Rawkus hip-hop record label for an undisclosed sum. Rawkus closed in 2004.

James set up his company after dropping out of Harvard. Elisabeth had worked in the News Corp. empire, then stalked out to start her own business. But now, they've both been brought -- and bought -- into the family fold.

I have no idea whether the Shine deal is a good deal or a bad one for News Corp.. Its properties include MasterChef, Law & Order UK, and Biggest Loser, but $675 million is a lot of money. What I do know is that Elisabeth Murdoch is The Biggest Winner here. In case you're interested -- and why shouldn't you be? -- this deal is a payday of about $300 million for Elisabeth and her trusts, who own a combined 53.5% of Shine's stock, according to British public records.

News Corp. says it's paying 415 British pounds for Shine, including Shine debt that it's assuming. Subtract 45 million pounds for the debt, convert pounds to dollars, and the 53.5% stake is worth about $320 million.

This is actually the second time Elisabeth and Daddy have done business. The first time, in 1994, Rupert found two California TV stations for Elisabeth and her then-husband to buy, and personally guaranteed the $35 million loan they took out to buy the stations. They flipped them less than two years later for a $12 million profit.

Did Rupert, who as chairman of News Corp. has a fiduciary obligation to his shareholders, offer the company the first bite at those TV stations? Did the company's board approve the Rawkus deal that brought James into the company? News Corp. declined comment. The company says its lawyers vetted the tentative Shine transaction (which is an agreement in principle rather than a done deal), and that the board approved it unanimously and will vote on it again after negotiations are concluded.

Four years ago, News did a multi-billion-dollar deal to cement Murdoch family control: trading assets and cash to John Malone's Liberty Media (LINTA) in return for Liberty's News Corp. stock, including a hefty holding of voting shares that threatened the family's control. But News' public shareholders got the right to vote on the Liberty transaction. That's not the case in the family deals.

How can Murdoch do this stuff with only about a 12% stake in a giant public company? It's because only about 30% of News Corp.'s shares have voting power, and Rupert Murdoch and a family trust own 40% of them. And it's because he's Rupert Murdoch, known as a dominating personality.

Murdoch has done an amazing job transforming a small, obscure Australian newspaper company into a world-wide colossus. Along the way, he ignored Wall Street's opinions, did what he wanted, took huge risks, and generally succeeded. Whatever you think of News Corp.'s politics -- which isn't today's subject -- you have to admire and respect what Murdoch has accomplished on the business front.

But no matter how much you respect Murdoch, this all-in-the-family stuff just isn't right for a public company.

It's one thing to have News Corp. employ family members, and for Rupert Murdoch to let it be known he wants to be succeeded by someone named Murdoch. But it's a whole different thing to use assets of a company 88% owned by the public to buy businesses owned by Murdoch children. And we may not be done—Lachlan Murdoch still has his own company.

News Corp. preaches free enterprise. But when it comes to Murdochs, the company has a different value: family enterprise.

Doris Burke contributed to this article.

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About This Author
Allan Sloan
Allan Sloan
Senior Editor at Large, Fortune

Allan Sloan, who has been writing about business for more than 40 years, joined Fortune in July of 2007. Before that, he was the Wall Street editor for Newsweek for 12 years. His work also appears in The Washington Post. Allan is a seven-time winner of the Loeb Award, business journalism's highest honor, receiving awards in four different categories for five different employers. He is a graduate of Brooklyn College and has a master's degree in journalism from Columbia University. He and his wife live in New Jersey. They have three grown children.

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