Try these numbers for size.
The market capitalisation of News Corporation leapt by $4 billion to $53 billion overnight as investors openly celebrated the coming demise of the world’s biggest print media business. The Wall Street Journal initially broke the story last night, Australian time, and then a typically circumspect News Corp released these hugely profitable words:
“News Corporation confirmed today that it is considering a restructuring to separate its business into two distinct publicly traded companies.”
The value of the Murdoch family’s stake in News Corp immediately shot up by about $600 million to $7.5 billion, reaching its highest level since Rupert Murdoch’s last major newspaper folly in 2007 when he squandered $US5 billion buying The Wall Street Journal. To put this sharemarket reaction in perspective, it is worth considering the current market capitalisations of three struggling debt-laden Australian media companies:
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- Fairfax Media: $1.3 billion
- Seven West Media: $1.13 billion
- Ten Network Holdings: $700 million
In other words, one announcement to demerge that financial black hole known as News Corp’s vast newspapers division instantly created more value for the company than the combined value of Fairfax, Seven West and Ten.
As Kerry Stokes plays his strange game at Consolidated Media Holdings, maybe News Corp should quietly shell out $200 million for a quick 15% of Seven West Media after the market emphatically declared no confidence in the ability of oil man Don Voelte to continue the superb performance of David Leckie. These numbers just go to show that when it comes to the financial muscle of media moguls, no one gets within a bull’s roar of Rupert.
Many questions arise from the News Corp statement. What happens in Australia? Do the stakes in Foxtel and Fox Sports go with the broadcast company, leaving News Ltd on its own?
What happens to all the debt taken on from the $4 billion to be spent by Foxtel and News Ltd taking out Austar and James Packer’s Consolidated Media Holdings, Kerry Stokes permitting? And what happens to the $1 billion controlling stake in REA Group (realestate.com.au) that News Ltd owns?
The Australian‘s business columnist John Durie (who is close to Rupert) reported this morning that News Ltd would be left intact in Australia. That makes sense given the way News Ltd and Foxtel are embedded with the cross-promotion and co-location of Sky, the newspapers and particularly sporting coverage.
It would also leave a domestically focused integrated media business for Lachlan Murdoch to run, if he can ever extricate himself from his James Packer-financed disasters at Network Ten.
The two key points to remember about Rupert is that he’s a control freak and fanatically dynastic. But surely even he couldn’t remain executive chairman of both companies?
However, the publishing demerger will present a unique opportunity to tackle issues such as News Corp’s lack of independent directors and dual class voting gerrymander.
The best thing about the current $US10 billion buyback, which is currently $US4.57 billion complete, is that News Corp has been buying back non-voting A class shares. Therefore, the Murdoch family are now up to about 14% of the total shares on issue, while still dominating through holding almost 40% of the voting stock.
Given that the publishing business takes pride of place in the Murdoch family and will be about one-tenth the size of the rest of the company, it wouldn’t take much for the Murdochs to unwind the gerrymander in this business while spending some of their own money buying a bigger economic stake. For example, Nomura media analysts Michael Nathanson recently valued the entertainment assets at $US23.06 per share, with the publishing division only worth $US1.17 “at a minimum”.
The Murdochs have been so successful building News Corp’s North American film and television assets that they can’t afford to buy control democratically. They could with the publishing division, given the value is so relatively small.
The assessment is backed by the company’s own numbers. News Corp’s entertainment assets contributed three-quarters of the $US25.34 billion in revenue for the first nine months of the 2011-12 financial year. Those assets accounted for roughly 90% of the operating profit in that period of $US4.2 billion. The publishing division contributed $US458 million (which was down sharply from the $US594 million in the first nine months of the previous financial year). News’ publishing businesses, including Harper Collins, had revenues of $US6.8 billion in the nine months to March.
How News Corp would allocate its near-$US11 billion of cash remains unclear, as is the question of which company would keep the liabilities for the legal bills and potential penalties relating to investigations in the UK and the US for phone hacking, bribery and cover-ups.
Can a split push all those problems off into the publishing company, leaving the broadcast arm free? It would need to have plenty of cash on the books for regulators to agree. These contingent liabilities make the publishing division unsalable, so a demerger is the only option left.
The publishing business will still be a giant, the largest in the world. But it will be a fading giant, facing the same pressures that Fairfax Media is grappling with. But being the biggest and most visible group will make its problems even more noticeable. The Wall Street Journal does have a far bigger and better-run digital operation based on a semi-private/semi-public paywall, unlike the strict paywalls at The Times in London and The Oz. The futures of both will now be exposed by the split.
Cross subsidisation will vanish, no matter what Murdoch or others say about the intention to keep these profitless publications. News Ltd in Australia will be big, but it will no longer have the billions of dollars of News Corp cash flows and cash reserves to back it. It will be just as vulnerable as Fairfax, despite its greater size.
You wouldn’t want to be a journalist on The Times or The New York Post as these indulgences are the biggest loss-making newspaper in history, having dropped well over $1 billion for News Corp shareholders through the years. The same goes for The Australian, which will no doubt trumpet this latest act of genius by its creator and chief sponsor.
Alas, it is most unlikely The Oz will remain a daily newspaper for very long once it is forced to justify its subsidised existence in a much-smaller listed company.