Rupert Murdoch has started the hard sell of the planned divorce in his media empire with an investor day in New York. It was big on “trust me, I’m Rupert, and I’ve proved the critics wrong before” and short on compelling reasons why investors should retain or buy shares in the new News Corp, which will control the analogue, print and Australian pay TV assets.
The underlying weakness and lack of market belief in the new News Corp was underlined by the decision last week to run a $500 million share buyback scheme immediately after the split to soak up much of the selling expected to hit the market in Australia and the US. As a result, the new company will take on its first lot of debt. It won’t use any of its $US2.6 billion cash pile, because that wouldn’t be tax-effective.
Murdoch has a history of proving people wrong (eg. Sky in the UK; he bet the company on that). But he also has an unfortunate history of wasting money (and getting away with it) like no one else in business. That why shareholders in News Corp (the parent) have seen losses of $US7 billion since 2007 when he overpaid in the $US5.6 billion purchase of Dow Jones and The Wall Street Journal, which was written down by nearly half a year later.
There was another $US2.7 billion writedown in the value of the papers (to be the core asset in the new News Corporation) a year ago, and a further $US1.2 to $US1.4 billion revealed last Friday in the final filing of information for shareholders before they voted on the split. That’s voting shareholders; Murdoch controls 39% of the votes.
The latest writedowns were taken against the value of the company’s Australian papers in its News Ltd unit — the majority of the $US2.7 billion impairment charge in 2012 was also taken against the value of the Australian papers. Analysts estimate well over $US3.5 billion has been slashed from the value of News Ltd mastheads lately. News Ltd papers have dropped more than half a billion in revenues in the 21 months to March 31.
That impairment of $US1.2 — $1.4 billion will nicely be offset by the $US1.25 billion asset write-up made when the final 50% of Fox Sports Australia was bought in the $A2 billion takeover of Cons Media in late 2012. All these losses have been accepted by the company’s boards (don’t forget the $US4 billion lost on the internet in the late 1990s or the $US600 million-plus lost on the MySpace deal) and by shareholders because his family controls the voting shares. Murdoch is a strong believer in freedom of the press and democracy, but not in his empire.
Murdoch told the investor briefing overnight (he is in Australia next week on June 5 with the same message) that the spin-off of the print (and Australian pay TV) assets gave him an “extraordinary opportunity that most people don’t get in their lifetime to do it all over again”.
He said he had made many mistakes in the 60 years since he started off with “one small newspaper and an overdeveloped ambition”. But he added that he frequently defied sceptics.
Murdoch acknowledged that some assets were “challenged”, but he assured investors that the properties — including newspapers in the US, UK, and Australia — were “undervalued and under-developed”. His goal was to “compress the success timeline of the original News Corp from 60 years to 10 years. You might think that is crazy. But back in the 1950s we only had lead pencils and typewriters. Today we have wi-fi, 4G and digital compression.”
Comments from new News Corp CEO Robert Thomson will strike terror into the hearts of the hacks still at the company’s print properties. He said the new company would have “a permanent start-up sensibility” and would “be relentless in our cost-cutting and in our pursuit of profits”. These efforts will be driven by the mostly London and New York-sourced executive team. Australian (News Ltd) influence on this team will be small at the top, except for director Lachlan Murdoch.
No specifics were given, but there’s one grim fact for the new company and its would-be investors to contemplate: the value of most of its assets — the newspapers, magazines and books — are falling, thanks to new digital technologies (hence the $7 billion in writedowns since 2007). The Australian pay TV assets won’t rise much, if at all, because Foxtel and Fox Sports are now stuck in a mature market rut, with high-cost offerings, high debt and fully valued assets. The assets will be worked harder, with continuous cost cutting to generate profit growth wherever possible.
New investment will be rare; in fact, the biggest investment will be in the other half of News — 21st Fox Group and its plans to spend at least $US1 billion establishing a national Fox Sports network across the US to take on ESPN. That alone tells us a lot about the relative futures for the two companies that once made up News Corporation.