One way to generate alpha is to seek out those securities that are trading at a discount to intrinsic value, with some sort of corporate action hanging in the balance to align price more closely to value. One such catalyst includes spinning off underperforming businesses (or those less appreciated by investors), thereby allowing stock market participants to invest in 'pure plays' and apply higher multiples to earnings on the crown jewels. The other way to play a spinoff is to buy the underappreciated business after the distribution, if its price falls well below its intrinsic value due to heavy institutional selling.
News Corp. (NWS) (NWSA) presents one such opportunity for value investors. On June 28, 2012, management indicated it would break up the business, splitting up the global film and entertainment businesses, and newspaper publishing and ancillary businesses.
On March 8, 2013, News Corp. announced the details of its spinoff of certain of its businesses in a 14A filing with the SEC, just days after Time Warner (TWX) indicated it would split off its magazine assets. To me, it's an indication that media conglomerates are generally undervalued, including French media and telecom conglomerate Vivendi (OTC:VIVHY), also undergoing a number of asset sales and/or spinoffs.
New News Corp:
According to the SEC filing, the spun off new News Corp business will retain the News Corp. moniker, and include the following assets:
- News and Information Services: Assets include The Wall Street Journal, Dow Jones Newswires and Factiva, Herald Sun in Australia, The Sun and The Times in the U.K. and News America Marketing Group.
- Cable Network Programming: FOX SPORTS Australia, the leading provider of sports programming in Australia.
- Digital Real Estate Services: 61.6% of REA Group Limited, which owns the leading digital portals for residential and commercial property in Australia based on monthly site visits.
- Amplify: A digital education business focused on the digitization of K-12 education.
- Foxtel: 50% of Foxtel, the largest pay-TV provider in Australia based on total subscribers.
Strong Balance Sheet:
In addition to these businesses, the new News Corp will be provided a clean balance sheet with $2.6 billion in cash and no debt. There is speculation the healthy cash balance could be used to purchase additional newspapers at bargain prices, including the Los Angeles Times, as its owner The Tribune Company emerges from bankruptcy.
Collectively, these businesses generated $8.6 billion in revenue and $782 million EBITDA ($1.15 billion excluding the loss making education startup business, Amplify) in fiscal year 2012, representing an EBITDA margin of 9% (13.3% adjusted). As content makers continue to figure out ways to increase the efficiency of delivering content through digital formats, and develop additional methods to monetize premium print content (pay walls at WSJ, example), I expect revenues to increase and margins to expand.
The new News Corp. will be responsible for the legacy liability and expenses as they now relate to the phone hacking scandal at the now defunct British tabloid News of the World. Securities litigation and legal expenses will likely hamper profitability for the foreseeable future.
Another risk, of course, is adjusting the publishing business model to the digital environment. The new News Corp will retain many solid brands known for premium content and it benefits from a wide readership, a subscription-based model for certain of its assets, and a global footprint, so I expect the business to adjust to the new market.
My assumption is that the new News Corp. will be indiscriminately sold as the market values the film and entertainment businesses underlying Fox Group (the name of the new group is subject to shareholder approval) higher, and the market dubs News Corp. a stodgy, old newspaper business. But the new News Corp. will be more than newspapers, including significant pay-TV businesses in Australia, valuable digital properties, an education business, and a global presence, especially in England, Australia and the United States.
Time will tell what the price action and valuation on the new News Corp. will be. Value investors should get their assessments of underlying value ready in advance of the spinoff and be patient. The market just might throw the new News Corp. out with the bath water.