News Corp confirmed the split will go ahead overnight in an orgy of laudatory local coverage from the papers in Australia, which continue to rediscover the joys of “shareholder value”. But of greater interest than what the courtiers are singing, are the comments of chairman Rupert Murdoch. He too has “found” shareholder value (including for himself and his family as the split will make him richer).

“Our publishing businesses are greatly undervalued by the sceptics,” Murdoch said in a memo to staff. “Through this transformation we will unleash their real potential and be able to better articulate the true value they hold for shareholders.” No surprise in those sentiments but the “true value” of the publishing assets won’t rise until loss-making newspapers in London, New York and Australia are sorted out.

But absent from much of the coverage in News Corp papers was the news that the split hasn’t won over ratings group Standard & Poor’s. It has left News Corp and its BBB+ corporate credit and other ratings, on CreditWatch with negative implications. “While we view the publishing businesses as subject to significant long-term structural risks, the spin-off affects business diversity and cash flow,” S&P credit analyst Michael Altberg said in a statement. S&P said the CreditWatch placement reflects lack of resolution regarding governance deficiencies and legal investigations in the UK and US stemming from phone-hacking allegations, as well as uncertainty about the longer-term impact of the proposed spin-off.

But those concerns were absent from the Murdoch’s marketing campaign overnight as he flitted from a New York TV studio to interview and back again, as well as appearing on a conference call with analysts (remember how he missed the three previous quarterly calls). In a series of interviews that ranged from the in-house Fox Business News, to CNBC, the Financial Times and newsagencies, he showed, again, that his 81 years hadn’t slowed him down, and that his capacity to surprise was still as sharp and baffling as ever.

For example, he told the FT that he didn’t know who would lead the publishing business (it was left unsaid in the statement), but said “his son Lachlan Murdoch was unlikely to take the role”, as some observers have speculated in recent days. In an interview, Murdoch also promised to be a “pretty active” chairman at the publishing business.

And this gem, which puts all the papers in the new publishing business (The Australian, the New York Post and The Times in London on notice): “You’re not going to see any print losses tolerated anywhere,” he said, indicating that each newspaper would be expected to pay its way over time. The words “over time’ are the key. How long is a piece of string is another way of putting it. The new management will have a different view.

Also not detailed was how News Corp plans to split its $US15 billion of long-term debt and $US10.7 billion in cash and cash equivalents between the two companies. But Murdoch reportedly told analysts that the publishing division would be endowed with a “robust” cash position to help it make investments and grow, but he also conceded that shares of the unit would “clearly” trade at a lower price-to-earnings multiple on the sharemarket following the split. But the new publishing company will start with an unspecified injection of capital, and will include its small education business and all of its cash-generative Australian assets, including its pay TV holdings.

But while there’s plenty of scepticism about the publishing business, the outlook for the entertainment area has been largely ignored. It’s better than publishing, but looking at the News Corp financial reports, it is depends heavily on the success of Fox News in the US and the other Fox cable channels, especially the sports channels.Entertainment profits grew 13% from 2008 to 2011, all of that has come from the cable segment, whose operating income more than doubled between 2008 and 2011 to $US2.76 billion. But broadcast TV, satellite TV and the film businesses saw operating profit fall over the same period. With broadcast TV, operating profit fell almost in half in that period, from $1.1 billion in 2008 to $US681 million in 2011 (partly due to sales of some TV stations in 2008).  The film studios peaked with the Avatar surge in 2010, but since that movie, big hits have been thin on the ground for Fox.

(Operating income at the publishing businesses dropped 26% in the same period). The past year has seen an improvement — as the US economy has improved — although the fourth quarter will see lower earnings from many of News’ divisions for various reasons (according to guidance given with the third-quarter result).

Movies have also been hurt by the slump in DVD sales thanks to the rise of Netflix and Redbox, which rent DVDs. This is continuing and is undermining earnings for every movie Fox and other studios  release.

With the US economy slowing for a third year and unemployment still high, the chances of a significant surge in earnings from broadcast TV (the Fox Network and stations), looks remote for the next couple of years. Broadcast television, including News Corp’s Fox network and TV stations, was hit hard during the 2008-09 recession as advertising slumped.

US consultants SNL Kagan says gross advertising revenue at US free-to-air TV networks fell to $US17.2 billion in 2011 from a peak of $US19.4 billion in 2006. It sees little growth in coming years. Broadcasters, including Fox, have started grabbing carriage fees from cable-operating companies, but these payments are small beer.

The driver in the entertainment business has been the strong growth seen in Fox’s cable networks, thanks to higher ad revenues and increased subscription fees. Michael Nathanson, of Nomura Securities, said this week that he sees the cable networks growing revenues by about 11% a year over the next three years, with earnings growing faster than that rate.

But he and other analysts warn that the strong cable outlook is threatened by the weakening health of the US economy and the emerging trend of “cable cutting” as cable subscribers close their subscriptions. According to research firm SNL Kagan, US cable operators lost 741,000 basic video customers in the third quarter of 2011, the biggest fall since it started watching the segment in 1980.

The firm and other analysts say there’s a belief that rising cable charges have started forcing Americans to treat cable as a discretionary purchase, rather than a basic need. Most comment is on the question of whether US cable is pricing itself out of the market in an economy that still remains in recession (in employment and take-home-pay terms). Overall, US cable subscriptions fell 2.3% in the last half of 2011 to about 100 million.

The big development has been the growth of high value-added subscription packages including broadband internet and telco services, including mobile and smart phones. Comcast, ATT, Verizon, Time Warner and other cable and telco operators are growing these businesses (the telcos are growing cable operators and the cable operators are emerging telcos). News Corp and its Fox cable networks are not in these businesses, but need to be told to maintain their growth, according to many analysts.

That could be the next big deal for the entertainment business once the separation goes through. For the publishing business, there will be no such luxury, it will cost cutting and slimming on the menu. Investors currently in News Corp will overwhelmingly want to hold shares in the entertainment business. The publishing company will be an orphan stock, even with the pay-TV business in Australia (and presumably Sky in NZ as well).

Peter Fray

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