RUPERT MURDOCH’S News Corp is preparing to spin off its newspaper business into a separate company, an acknowledgement that the printed page that gave rise to a media empire will never again be central to its future.
Murdoch’s plan to split his company represents a break from the past. The 81-year-old billionaire built the company from a single Australian newspaper he inherited from his father. And through the years, he maintained a fondness for newspapers even as he purchased entertainment companies and assembled a global conglomerate with a market value of $52 billion (€42 billion).
The Wall Street Journal, News Corp’s flagship newspaper, reported early yesterday that News Corp’s board of directors will consider the plan Wednesday and possibly announce its approval Thursday morning.
Under the proposal, newspapers will be shunted off into a separate publicly traded entity, which Murdoch will control along with a second company that comprises News Corp’s entertainment business. That portion of the company includes Fox News Channel, its broadcast TV network and the 20th Century Fox movie studio.
Investors hailed Tuesday’s announcement that News Corp is considering a split, sending the stock up $1.68, or 8.3 per cent, to close at $21.76 Tuesday. During the day, the stock was as high as $21.89, its highest level since hitting $21.90 on 25 October, 2007.
Analysts said the newspaper and book publishing division could be worth about $5 billion — what Murdoch paid the Bancroft family for Dow Jones & Co, the publisher of The Wall Street Journal, in 2007.
News Corp investors have never liked that acquisition and over the last five years the stock price has stagnated, hurt by fears Murdoch would overpay for other newspaper assets.
By contrast, investors adore Chief Operating Officer Chase Carey, who along with Murdoch’s son James, the deputy COO, have been steering the company toward a future based on expanding profitable pay TV operations around the globe.
Benefits
The split could be beneficial for both companies. Part of News Corp’s problem in recent years is that it has been trying to please two kinds of investors with different, and somewhat conflicting, demands: Those looking to make a killing on a rising stock price and more conservative ones who like less risky, more predictable companies that pay generous dividends.
News Corp has failed to please either. Its stock is no higher than it was five years ago, and it pays a dividend of just 17 cents a year, or 0.8 per cent of what it costs to buy a share. The average company in the S&P 500 stock index pays its owners cash each year equivalent to 2 per cent of its stock price.
A spin off might change this. It would free the TV and film business from the drag of the slower growing publishing business. And it would allow the publishing business the freedom to hike its cash payout.
“News Corp has one of the best TV businesses, but some people like musty, dusty publishing companies that pay great dividends,” said Barton Crockett, an analyst at Lazard Capital. “It’s a good thing for shareholders.”
Crockett said newspapers have been raising dividends lately, and he thinks a separate News Corp publishing business could do the same, possibly to 6 per cent, which is what rival Gannett Co pays.
News Corp’s move comes as Britain’s communications regulator, Ofcom, enters the final stages of its review of whether satellite TV firm British Sky Broadcasting is “fit and proper” to hold a broadcast license. News Corp holds a 39 per cent stake in BSkyB, but its ownership is in jeopardy because of the hacking probe.
Analysts said the separation of assets might appease regulators and help the company avoid being forced to sell its remaining stake, worth some $6.9 billion.
“I’m not saying it completely ameliorates Ofcom’s concerns. But I think it helps,” said Canaccord Genuity analyst Tom Eagan.
British investigators have been probing allegations that News Corp’s UK newspaper journalists hacked into phones and bribed public officials in the hunt for scoops. The probe caused the company to abandon its bid for full control of BSkyB last year.
The media conglomerate did not specify Tuesday which businesses each company would contain, although The Wall Street Journal reported Monday that the company is considering separating the newspaper and book publishing businesses from the entertainment arm.
News Corp’s entertainment business is far more profitable. It accounted for about 75 per cent of the company’s revenue and nearly all of the operating profit in the first nine months of the fiscal year, which ends this coming Saturday.
Bernstein analyst Todd Juenger said in a research note that the split would allow the company to invest more in the growing entertainment field “without the baggage of publishing.”
A former News Corp executive familiar with internal company deliberations says such a split has been talked about for years, although discussions gained new momentum in the wake of the phone-hacking scandal, which erupted last July.
The former executive, who spoke on condition of anonymity in order to speak candidly about internal company deliberations, said no final decision has been made.
Evercore Partners analyst Alan Gould said that without the publishing assets, revenue growth at the bigger TV and movie entity would nearly double to about 7 per cent a year.
It is unclear if the spun-off publishing unit would also bear the legal costs of the UK probe. In the first nine months of the fiscal year, probe costs have totaled $167 million.
The point of a split is not to create a smaller company “that would just wither and die,” said Tom Eagan, an analyst with Canaccord Genuity. It would have to contain enough profitable businesses to attract investors.
Eagan pointed to the successful spin-off of cable TV giant Time Warner Cable Inc. from the entertainment company Time Warner Inc. in March 2009. Because the cable division was more willing to pay out dividends and buy back shares, its stock price has more than tripled since then. Meanwhile, Time Warner Inc’s stock price has doubled.
Time Warner shareholders were granted stakes in both separated companies and likely fared better than if the company hadn’t split, Eagan said.
So-called conglomerates that combine disparate businesses in one company were once popular. But the fashion for many years has been to slim down and simplify.
Motorola recently spun off its cellphone unit. Sara Lee Corp is creating a new public company from its European coffee and tea business. Kraft Foods Inc. is also splitting in two — one for North American brands like Velveeta and one for Cadbury chocolates and other global snacks.
The problem for News Corp isn’t just that newspapers and books make less money than television and film. It’s also that investors value the earnings from each differently. They are willing to pay less for a single dollar of earnings from the former than they are for a single dollar of earnings from the latter.
On Monday, investors buying News Corp stock were paying the equivalent of $5.80 for every $1 of operating earnings that the combined company is expected to generate this year, according to Gould. That’s 20 per cent lower, or $1.50 less, than investors are paying for more pure play TV and film companies like CBS Corp and Viacom Inc.
Do the math on News Corp’s expected $6 billion in operating earnings this year, and that means the company is being valued $9 billion less than its TV and film rivals. Gould says the idea behind the split is to capture some of that $9 billion. He believes the company could do it and is recommending that his investing clients buy the stock.
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