There were clues in News Corporation filings on Monday about how much the company’s spun-off publishing entity will suffer from a weak advertising market and declining circulation.
No Christmas gifts from Santa for Rupert Murdoch and his elves on the News Corporation board in Friday night’s disclosure of details of the proposed newspaper and publishing arm (“bad” News as opposed to the “good” News Corp with broadcasting assets). The spun-off company will clearly struggle to live on its own, no matter what the News publicists and analyst shrills in the markets might argue.
In fact, the timing of the release of details of the news/publishing (and Australasian pay TV assets) company on the Friday night before Christmas tells us Murdoch and his advisers hold no illusions about the lack of attractiveness of what will be the new News Corporation once the split happens (the broadcast assets will be renamed Fox).
Despite its $US8.6 billion dollars a year in revenue and over $US13 billion in assets, this will be a weak business — a paper giant facing the same clouded future that smaller rivals in the UK, Australia and the US face as the digital revolution and internet erode its lifeblood: ad dollars and eyeballs.
Already we have seen red ink on reports from News Ltd in Australia for June 30 and the News International group in London. Hopefully the final split documents will detail how the individual papers in Australia, such as The Australian and the Herald Sun, are performing, along with the New York Post (estimated by US analysts to be losing $US30 million a year) and the weak UK papers, The Times and The Sunday Times, which lost a reported $43 million in the year to June.
The key to the group’s future strength will be the earning power of The Sun in London, The Wall Street Journal in the US and the overall performance of News Ltd in Australia with its Fox Sports arm.
News Corp faces the prospect of more asset write-downs and weak revenue growth in the next year, especially if economic conditions don’t pick up. Not mentioned in the filing with the US Securities and Exchange Commission is the biggest immediate threat: the impact of the fiscal cliff in the US from the start of 2013. That would blow another hole into the business should US politicians fail to avoid the economic catastrophe.
Like Fairfax in Australia and Gannett in the US, News Corp is hostage to the advertising sector. The Australian pay TV businesses — 100% of Fox Sports, 50% of Foxtel and 44% of Sky in NZ — won’t be enough to offset this weakness, nor will the Australian digital real estate business, the Harper Collins publishing entity (which is facing pressures of its own from e-books) or the nascent education business called Amplify.
The new News Corp will include five divisions: news and information services; digital real estate services (realestate.com.au in Australia); HarperCollins; Fox Sports and Australian cable TV programming; and an “other” division including the Amplify education business (small beer and could be sold off) plus the Foxtel and Sky TV stakes.
According to its filing on Friday:
“New News Corp suffered a net loss of $US2.08 billion for the year to June 2012, on revenue of $US8.65 billion (almost 5% lower than the 2010-11 revenue total). The loss came after $US2.76 billion of impairment and restructuring charges, largely relating to write-downs in the book value of its UK, Australian and US newspapers. Earnings before interest, tax, depreciation and amortisation, the usual measure of core profitability in the media sector, fell more than a third, from $US1.21 billion to $782 million after UK phone-hacking scandals forced the closure of the News of the World in July, 2011 and the weak economy hurt Australian revenues and earnings.”
Additionally, the filing reveals that in the first quarter of fiscal 2013, ending September 30, the publishing company had a net loss of $US92 million compared with a net profit of $US38 million a year earlier. That was on revenue which dipped to $US2.133 billion from $US2.165 billion in the September quarter of 2011. The newspaper and information division had revenues of $US1.66 billion in the three months to September, 78% of the new News Corp’s total revenues for the quarter.
For the three-month period to September 30, new News Corp relied on advertising for 48% of that $US2.13 billion in revenues, with 28.5% coming from circulation and subscription income. In total, more than 78% of revenues for the quarter came from the traditional analogue media sources (82% in the same quarter of 2011). Newspaper revenues fell 6% or $US102 million from the September quarter of 2011 to the same quarter this year. And the filing revealed a further $US115 million in impairment charges in the three months to September, up from $US64 million in the corresponding quarter in 2011. Of the $US115 million, $112 million was in the newspaper business and much of that related to cuts in Australia.
The company will have total assets of $US13.3 billion, with intangibles (such as mastheads) of $2.58 billion and goodwill of $2.629 billion accounting for well over 45% of the total figure. The company will have cash of around $US1 billion and News has promised it will have debt smaller than its cash figure, but there was no evidence of that in the filing.
Given the company’s continuing exposure to the weak newspaper sector, the value of those intangibles and goodwill are likely to remain under pressure of further impairment. There were no figures for carried-forward tax losses which are sure to be a major asset for the new News Corp. Their importance can be gauged by a figure of $US927 million in deferred taxes among the group’s liabilities.