Splitting News Corp Means Shoring Up Print Ops
News Corp.'s decision to throw its publishing operations under the bus in a division of assets is a shortsighted effort to pacify shareholders disgruntled with a year-long phone-hacking scandalin Britain and declining stock price that could blunt the newspapers' digital survival.
Is it realistic to expect a pure-play publishing company to do more experimenting with digital business models than it does now? News Corp. Chairman Rupert Murdoch promises the standalone entity will have "a robust net cash position" for potential acquisitions. But where will the investment funds come from?
Nomura Securities analyst Michael Nathanson estimates the publishing business will have $362 million in profit in fiscal 2012 and a value of about $2.6 billion, or 7% of News Corp.'s current market cap. By comparison, News Corporation's entertainment business will earn $3.1 billion in fiscal 2012 and could be the highest-growth portfolio in media, valued at about $52.5 billion--nearly the same as the existing company.
Barclay's Anthony DeClemente expects as much as $2 billion of News Corp.'s estimated $11 billion in cash will go with publishing to mitigate $1.5 billion in debt and an estimated $330 million in phone hacking-related legal expenses. Even with double-digit declines in ebitda, BTIG analyst Richard Greenfield expects publishing free cash flow to remain positive in fiscal 2015.
Still, those numbers speak more to getting by than getting on.
The publishing company will not likely seek another $5 billion deal like its purchase of Dow Jones in 2007, which was heavily written down and whose estimated value has deteriorated. But it will need to continuously invest in innovative digital applications and business models to better monetize its unique data and information.
The WSJ, as it is expected to be rebranded, is aggressively making variations of its content available to users through their device of choice to avoid the huge reader exodus spurred by The Times of London's hard pay wall tactics.
Wall Street Journal readers can "subscribe" for a few dollars a month to specific news channels through premium sources, such as Water Cooler, the Political Report and the Technology Digest in a unique revenue-sharing arrangement between Dow Jones, aggregator Pulse and Apple, which demands about one-third of money generated from apps on its devices.
The Daily experiment is a mobile digital-only newspaper app designed for the iPad and other tablets that allows automatically renewable subscriptions as an alternative to a browse-easy site. Despite missing News Corp's internal targets, the $30 million-plus venture is a valuable learning experience in mobile and digital information innovation that is not likely to be repeated in a publishing entity trying to go it alone.
Last week, Chase Carey, News Corp.'s COO supportive of the split, said the free-standing publishing operations will have “the impetus to grow and fulfill their potential “without explaining where sustainable investment funds would come from.
Some industry analysts believe News Corp.'s publishing operations will falter without the economic safety net provided the company's thriving entertainment assets. While the split may not exacerbate the steady streaming and downsizing of the newspapers' daily operations, they will no longer have ready access to News Corp.’s digital resources to support new revenue streams.
E. W. Scripps and Viacom-CBS are examples of companies that spun off faster from slower-growing media assets only to have the traditional newspaper (and broadcast) entities lag behind.
While investors applaud the 9% run-up in News Corp. stock, the future of the company's print operations remains uncertain. Existing investors will share in that uncertainty with one share of stock in the publishing company for every News Corp. share they own in the anticipated slowdown in an ongoing $10 billion stock buyback plan.
Gains from the entertainment assets' freedom from the so-called “Murdoch discount” will be offset by losses at a free-standing publishing enterprise.
In the nine months through March, the combined cable channel, TV station, satellite TV and movie businesses saw revenue rise 9% to $18.66 billion. Operating profit rose 23% to $4.17 billion. The proof is in the numbers. News Corp.'s shrinking publishing revenues declined 4% to $6.22 billion over the same period while operating profits slipped 22% to $458 million.
Little wonder management is considering ways to make the publishing company less vulnerable by incorporating News Corp.'s education division, the HarperCollins book business, possible acquisitions, such as Monster.com, and Australian assets, including the planned $2 billion acquisition of Consolidated Media Holdings (with TV operator Foxtel and Fox Sports Australia).
News Corp.'s 39% stake in BSkyB remains with its entertainment assets, even as UK regulator's debate its fate after foiling the company's proposed $12 billion buyout of the satellite provider.
The proposed spinoff is counterintuitive to media's rapid integration of content, advertising and commerce. The lack of synergies notwithstanding, the chances of their successful reinvention are better as an appendage--rather than a distant relation--to News Corps.’ core entertainment assets: cable channels like FX and Fox News, the 20th Century Fox studio and Fox Broadcasting.
"Newspapers, once the bastions of content creation and curation, are experience their fifth straight year of declining revenue. .. How does one create differentiated content in an economically viable manner when so few want to pay for it?" asked Internet guru and Kleiner Perkins partner Mary Meeker. That also includes advertisers, with print barely commanding 8% of consumer time spent with media and a rapidly declining 27% of advertiser dollars.
News Corp.'s standalone publishing enterprise is unlikely to answer that question.