Goldman Sachs, one of the two bankers handling the forthcoming News Corporation split, is forecasting a sharp fall in newspaper operating earnings in the 2013 financial year that started yesterday. The earnings forecast is contained in research circulated last week ahead of the formal announcement of the split on Thursday night, Australian time. It calls into question the value of the mastheads in the News Corp accounts for the June 30, 2012 financial year.
Goldman Sachs forecast the earnings before interest and tax for the newspapers would fall to $US321.2 million in 2012-13, a fall of close to 50% from the $US600.3 million forecast for the 2011-12 financial year. It is about a third of the $US989 million earned in the 2010-11 financial year.
But Goldman estimated that the publishing company would have earnings before interest, tax, depreciation and amortisation (EBITDA) of $US1.074 billion in the 2013 financial year, a figure not strictly comparable with the earnings estimates for the newspapers, which were on a before interest and tax basis (EBIT). Included in the estimate though were EBIT of $US54.7 million for the HarperCollins book publishing business for 2013 (and $US55.8 million for 2014), against nil for the 2011 and 2012 years. And Goldman Sachs estimated that magazines and inserts (mostly a US business) would go from no estimate for 2011 and 2012 to $US247.6 million in 2013 and $US243.7 million in 2014.
There was no estimate for contributions from Foxtel/Fox Sports in Australia and Sky NZ. In fact while Foxtel/Fox Sports and Sky NZ are to be retained in the publishing company (for operating synergies in Australia and other reasons), they point out that there will be no real split in the News empire in this country: the split is happening offshore and it remains business as usual here. In reality the stakes in Foxtel, Fox Sports and SKY NZ are just too far away from New York, Europe and north Asia and India where the entertainment company's main businesses are located.
So to pretty up the performance of News Limited, Rupert Murdoch has left what could be described as "growth assets" in Australia (25% of Foxtel, possibly 50% if the ConsMedia bid happens), and 50% of Fox Sports (possibly 100% if the ConsMedia deal happens). News Corp controls just over 60% of Sky NZ. Analysts also point out that one reason they are being kept in News Ltd is that News controls the management of Foxtel and Fox Sports.
If the shares were to go to the so-called entertainment company, that might be challenged, especially at Foxtel where Telstra owns the other 50%. News also has to be careful in retaining its stake in Foxtel and Fox Sports in a way that doesn't trigger pre-emptive rights Telstra and ConsMedia hold if there is a change of control. Some analysts wonder if transferring the 20% or 50% of Foxtel and the stakes in Fox Sports to the entertainment company might trigger these pre-emption clauses.
The publishing company will be based in New York, but News Ltd will contain 60%-65% of the assets, a situation that is unstable given that Kim Williams at News will report to whoever is appointed to the CEO's role, plus Rupert Murdoch as chairman. Tom Mockridge, the head of News International and former head of Sky Italia and Foxtel, is a leading candidate, a situation that won't please Williams.
Finally, analysts say privately that they would not be surprised to see News Corp reveal a string of asset impairment charges in the full year result in August for the 2011-12 financial year. They will be concentrated in the Australian and UK newspaper companies. The full impact of the loss of the News of the World
and the start-up of the Sunday Sun
have yet to appear in the asset lines in the News Corp accounts. And the cost of the local restructuring, announced last month and its impact on Australian intangibles will also have to be revealed. It's likely the full estimated cost of the restructuring in Australia and the changes in the UK will be taken in the 2012 financial year, along with the impact of any asset impairment charges.
Analysts point out that one of the drivers of impairment charges is the directors' expectations for future profitability of the assets. With Goldman Sachs forecasting a 50% drop in earnings for the newspapers in the 2012-13 financial year, a reduction in the value of the assets in the News accounts is on the cards.
These charges and costs will help lower the cost base and asset levels in the publishing company and especially in the newspapers to better align them with the continuing slide in earnings (as estimated by Goldman Sachs). It's called "cleaning up the books". New CEOs do it when they take charge and lump the full cost on their predecessor. News Corp can do the same in the publishing company because News Corp will no longer exist and the losses and other costs will be old hat.
The publishing company will benefit from getting upwards of $2 billion in new assets from Foxtel, Sky TV and Fox Sports, which will offset any losses from impairment charges.