News Corp shares rose another 2% on Wall Street overnight to end the day at $US22.50, a new five-year high as investors positioned themselves for the split and access to the high-value entertainment assets, not the weak newspaper and publishing businesses.
The News board met this morning and unanimously approved the deal, with an announcement expected as Crikey hit deadline. Like all separations, it will see the party perceived to be the strongest paying the weakest some form of alimony and lump settlement. So analysts expect the entertainment company will leave a couple of billion of debt in the publishing company and little debt to give it a chance of surviving the shoals ahead of it.
Left unanswered so far is whether the structure in Australia where the fate of the Foxtel/Fox Sports business will determine how long the newspapers can survive. Equally, the question of the $2 billion bid for ConsMedia is now up in their air. That will now be a financing deal that will involve all the publishing assets, including The Wall Street Journal and the London papers, not just the News Ltd arm in Australia.
No wonder one of the conditions in the signalled offer from News Ltd is approval for the deal from the parent board of News Corp. That condition was ignored by the local media last week, but the strange absence of approval of the bid (and the financing from HQ in New York) is now easier to understand. It will be the parent board of the new publishing company that will have to approve it.
The $2 billion cost will be a major debt burden on the new publishing company and could chew up tens of millions of dollars of valuable cash flow, unless the funds are earmarked for the deal in the separation and extra cash allocated to the publishing company.
But the upshot of the split will be to welcome News Ltd, and especially those on The Australian, to the real world and not the safe, comfortable world of being part of a media giant with billions of cash to back their falling revenues and profits and rising losses. According to the market, The Australian and the other local papers are all but worthless, as are the papers in London and the New York Post. Only The Wall Street Journal has any value. Once the split happens, the Australian papers will join life in the same slow lane where Fairfax Media, APN Media and The New York Times, Gannett and other US and UK groups are battling for survival.
The belated realisation among the local cheer leaders at News about the split though raises a laugh. Since last week’s Australian restructure, there have been a long list of fawning stories and commentaries telling us how wonderful the changes are and how chairman Kim Williams was positioning the group for a rosy future. Balderdash! Now there’s the slow realisation that life is changing for the know-it-alls at News, but not everyone gets it – take Melbourne courtier, Terry McCrann in the Herald Sun yesterday. His effort takes the cake. for stating the obvious and ignoring everything else:
“The proposed split of Rupert Murdoch’s News Corporation into a TV and entertainment company and a separate publishing group is all about creating value for shareholders.
“On one level, it’s already worked, with the share price up 8 per cent on Wall St overnight and 82c in Australia this morning. That reaction will also make it all-but impossible for the company to backtrack.
“The added value comes from the higher-growth higher-profit TV and entertainment business attracting a higher valuation in the market.”
If “creating value for shareholders” was the criteria then this deal should have been done years ago. But McCrann and others in the local cheer squad have been silent, while deriding Fairfax, Seven and other media companies for destroying shareholder value. When the details of the split are finally published and analysts crunch their numbers, the destruction of value in the News Corp newspaper groups around the world will be stunning. McCrann and his fellow Murdoch boosters have for years ignored the destruction of $US3 billion of the $US5.6 billion purchase cost of the Dow Jones Co whose major asset is The Wall Street Journal.
But there are already some gloomy early valuations doing the rounds. For example, one Morgan Stanley analyst in New York valued the US newspapers at $US337 million. That includes The Wall Street Journal, whose valuation is offset by losses from the New York Post and weak earnings and low valuations of the Australian and UK papers.
Other analysts on Wall Street estimated that the group’s entire publishing portfolio stretching from Adelaide to London could be worth anything from $US3 billion to $US4.3 billion — well below the $US5.6 billion originally paid for the Journal in 2007. That was cut by $US2.8 billion in 2009, and by a further $US200 million in the next year.
After this week’s 10% plus increase, News Corp is now trading on a 15 times earnings multiple, compared with the 17 times ratio for Disney (which is a pure entertainment company). By way of contrast, Gannett, the big US newspaper group (it owns US Today, the second-biggest-selling daily in the US) trades in a multiple of just over seven times earnings.
Michael Nathanson, head of Nomura’s US media research group, has estimated that News Corp’s entertainment business will earn $US3.1 billion in the 2011-12 financial year that ends on Saturday.
At Disney’s valuation, the entertainment business would have a market value of about $US52 billion and be worth $US23.06 a share or thereabouts. That compares to the market valuation at the close this morning of $US52.8 billion. In other words, the entertainment company alone will be worth more than the company is at the moment, meaning hard-nosed analysts place a negative value on the newspaper and publishing businesses (which is absurd, but it is a sign of the gloom settling over traditional newspaper companies). Nathanson said the publishing business would have a value of $US1.17 a share at a minimum, but the market reckons that might be too high.
Nomura estimates the publishing business’s 2012 profit at about $US362 million. Using Gannett’s multiple of just over seven times earnings, the publishing arm could be worth $US2.6 billion on its own (Fairfax is valued at about $A1.3 billion) as a standalone entity. News and its friendly New York analysts will try and claim a higher value, nine times earnings might be the best they can use. That would value the publishing arm at $US3.3 billion. Assuming the Journal is still worth $US2.6 billion, the rest of the business (HarperCollins, the Australian business and the London papers) would be worth $US700 million or thereabouts, which is less than Fairfax. Leaving the Foxtel and Fox Sports stakes (and perhaps the Sky Business in New Zealand) in News Ltd and the new publishing arm (which would defeat some of the purpose of the split) would improve the value of the publishing arm.
If that happens, it would raise the question of where the company should be located and run from. Kim Williams and News Ltd would argue for Sydney, especially if Lachlan Murdoch is CEO. The Journal and its US and Australian managers would argue for New York because the most profitable and single largest asset is based there.
Using a higher multiple of nine times, which would reflect some analysts’ belief that News Corp owns more promising newspapers than Gannett, the business would be worth nearly $US3.3 billion, or the same as its rival.