News Corporation has taken an axe to his company’s asset values ahead of the split, slashing the value of the company’s troubled publishing assets by $US2.9 billion. In fact the company indicated its restructuring Australian operations took the brunt of the impairment charges, and faced more cuts this year. It told investors that the huge cuts in asset values (which surprised analysts) were “most significantly (in) the Australian operations”.

And the outlook for the Australia newspapers is grim, with CEO Chase Carey warning of more cuts to come in Australia this financial year. He told a teleconference that 2012-2013 would be a flat year for the publishing business and that a recovery in UK business was likely to be offset by more losses in Australia (although the new, lower forecasts from the Bank of England overnight indicate the UK might not be so promising).

Carey also said he saw substantial costs still to be cut out of the Australian business. He said this would happen in coming months after the overhaul of management in the first half of 2012 announced in June by News Ltd CEO Kim Williams. Rupert Murdoch again skipped this conference call, but son James, who left the UK under a cloud, was present but did not speak. News Corp allowed reporters to listen to the conference, but not ask questions.

Crikey had reported last month that News was expected to reveal big impairment charges in its 2011-12 financial report this month. Because the charges were bigger than expected, News Corp shares fell 4% in after-hours trading in the US this morning. The company said the $US1.5 billion write-down of goodwill and $US1.3 billion cut in the value of intangibles mostly related to the group’s publishing businesses, “most significantly the Australian operations”. Some also apply to the UK.

That means News had written down the value of its newspapers by $US6 billion since 2008 when it slashed the value of The Wall Street Journal by half to $US2.6 billion. On top of these write-downs the full-year results included a $US224 million charge related to the costs of the ongoing investigations initiated upon the closure of The News of the World in the UK, including $US57 million in the fourth quarter.

But the latest impairment is a bit more cynical than that: it is a cost of the split in the company announced June 28 into the so-called growth business of broadcast media, and the “other” less promising businesses, including newspapers and book publishing which underperformed badly in 2011-12. News is leaving Foxtel, Fox Sports and Sky TV in NZ in the publishing company, ostensibly for management and logistics reasons, but in reality to give the business some appeal to investors. It also gives the Murdochs an escape hatch if they should be forced from the board and share register on the growth company.

The cuts in the value of the publishing businesses goodwill and intangibles is also an attempt to make the group more attractive to investors and improve the chances of earning a reasonable return on assets and funds employed. It is, if you like, a subsidy from the present shareholders of News Corp (including the Murdochs) to the new company’s shareholders and managers (who will include some but not all the Murdochs).

Like its competitors (with the exception of the FT Group and several other specialist publishers), News’ newspaper business has floundered around the world (though in the US the Journal seems to have done better in recent months than the papers in the UK and Australia). The slowdown in economies, the surge of the internet, weak ad revenues and falling sales have hurt it has much as they have hurt competitors, such as Fairfax Media in Australia.

The publishing operations in the US, UK and Australia, plus HarperCollins and the company’s coupons business, saw fourth-quarter earnings plunge $US131 million, or around 50% to $US139 million, from $US270 million in the June quarter of 2011. For the year to June, the publishing business saw earnings slump by more than a quarter to $US597 million from $US864 million. But the 2011 figure was cut by the $US125 million cost of a legal settlement to a damages case in the US. Excluding that, earnings slid 40%, or $US392 million.

News said the weak result from publishing was “driven by advertising revenue declines at the Australian newspapers, integrated marketing services business and UK newspapers, as well as the absence of contributions from the closure of The News of the World in the UK. The decline was partially offset by improved contributions from Dow Jones, driven by higher profits at The Wall Street Journal. The fourth-quarter fall in income “lower advertising revenues at the international newspapers and integrated marketing services business, as well as the absence of contributions from the closure of The News of the World in the UK. The quarter results also reflect a litigation settlement charge related to sales of ebooks”.

Full-year revenues fell 6.5% to $US8.248 billion from $US8.826 billion, and in the fourth quarter the fall was more than double that, down nearly 14% or $US330 million to $2.024 billion. The fourth-quarter impairment charge saw the company lose money at the bottom line: News reported a net loss of $US1.6 billion, compared with a $US683 million profit a year earlier. Before the charge revenues slid 7% to $US8.4 billion, as higher sales at its US cable TV businesses rose and contributions from other divisions fell. The company warned that the fourth quarter would be weak when revealing the third-quarter results in May. The charges cut full-year net profit from $US2.7 billion, to just $US1.2 billion.

The 1% rise in annual revenues from $US33.4 billion to $33.7 billion also took investors by surprise and resulted mostly from the 7% fall in final quarter sales and the company’s film studios business disappointed, along with DVD sales. Also not helping were weak audiences for the free-to-air Fox TV network and some of its key programs like American Idol.

Earlier today, News made it clear where the future growth was going to come from: despite the slump in the eurozone and the Dutch economy, international media business Fox International Channels is buying control of a Dutch cable television soccer broadcaster, in a deal estimated at around €1 billion ($US1.24 billion). Fox will buy a 51% stake in Eredivisie Media & Marketing CV, which holds the rights to broadcast Dutch league soccer. News also has rights to broadcast soccer in Germany, Italy and the UK.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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