The announcement by News Corp. (NASDAQ:NWSA) that its board has approved a split of the publishing and entertainment businesses of the company, has generated some interesting possibilities for current shareholders, and for those looking to get in on the action.
First of all, the split, which is targeted for June 28, will separate the TV and movie properties of the company from the book publishing and newspaper properties. Entertainment assets include the Fox Broadcasting network - both the TV and film studios; equity stakes in BSkyB and Tata Sky; and the National Geographic Channels. That new company will be called 21st Century Fox.
News Corp. will be the name of separately traded publishing arm of the company, which includes The Wall Street Journal, The Times, The Sun, HarperCollins, and education company Amplify.
"Today's announcement is a significant step in creating two independent companies with the world's leading portfolios of publishing and media and entertainment assets," said Rupert Murdoch, who will be the chairman and CEO of 21st Century Fox and executive chairman of the new News Corp.
"We continue to believe that the separation will unlock the true value of both companies and their distinct assets, enabling investors to benefit from the separate strategic opportunities resulting from more focused management of each division," he added.
The Split Itself
As for the technicalities of the split, existing shareholders in News Corp. will receive one share of Class A or Class B common stock in the new print media company for each four shares of Class A or Class B common stock they hold of News Corp. stock. The new publishing company will keep the name News Corp.
The new News Corp. board approved a $500 million stock buyback of company shares immediately after the split. That should offer support to its share price in the expected volatile trading soon afterwards.
After the spin-off, the new publishing company will have $2.6 billion in cash on hand. That is definitely of interest to investors- as to what it's going to do with it.
Shareholders will vote on whether or not to approve the split on June 11. There should be no problem with it being approved, as they have been pushing for it for a long time. There should also be no problem from the regulators that must give approval for the split. On May 28, Chairman Rupert Murdoch and Chief Executive Officer Robert Thomson said they'll provide more details on the split at a conference.
Poison Pill Provision
After battling Liberty Media Corp's John Malone from taking control of News Corp. in the past, the company has put in place a poison pill provision for one year after the company splits. The trigger for that will be if anyone acquires over 15% of the stock of either of the two companies.
Formerly, Murdoch ended up trading his shares in DirecTV (DTV) and $625 million in cash in exchange for the shares in News Corp. held by Malone. Malone ended up with a 41% stake in DirecTV. This will prevent any unwanted change in ownership in the first year. As for 21st Century Fox, it will have no ownership interest in News Corp., according to the company.
The existing News Corp. board has 16 directors. 21st Century Fox and the new News Corp. will have 12 directors each. Serving on the boards of the two new companies will be Rupert Murdoch and sons Lachlan and James.
Others on the 21st Century Fox board will be: Delphine Arnault, a Christian Dior deputy general manager; Jacques Nasser, the former Ford (NYSE:F) CEO; and Robert Silberman, executive chairman of Strayer Education (NASDAQ:STRA).
Serving on the print media News Corp. board: John Elkann, the one-time Fiat (FIATY.PK) chairman; Ana Paula Pessoa, a partner at PR agency Brunswick Group and a former executive at South American media company Globo (OTCPK:MGLO); and Masroor Siddiqui, a managing partner from Naya Management. Other directors named are Natalie Bancroft, Metcash Ltd. (OTCPK:MHTLY) Chairman Peter Barnes and former U.S. Secretary of Labor, Elaine Chao, and Robert Thomson, CEO of the new News Corp.
No discussion of the split would be complete without focusing on the latest seasonal numbers for the Fox broadcast network. They could have an impact on 21st Century Fox as it enters its new phase.
The biggest problem for Fox wasn't that its eight straight seasons of wins in the key 18-49 demographic was ended, but it was the precipitous way it ended that causes concern. As most people know, the inevitable fall in the popularity of American Idol has been anticipated for years, even though it still is among the five most popular shows in the demographic. But when you're a juggernaut that long, this looks like a disaster, and in general it was.
That was far from the only reason for the huge drop in numbers though. The relaunch of The X Factor was a big disappointment as well. What isn't as well known is the delays in the fall, which has a strong impact on the numbers of the network, as well as preemptions.
Here are the numbers for the 2012-2013 season of the four major networks:
Adults 18-49 (rating, change from 2011-12 season)
CBS: 2.9, down 3%
Fox: 2.5, down 22%
NBC: 2.4, down 4%
ABC: 2.2, down 12%
Total Viewers (in millions, change from 2011-12 season)
CBS: 11.85 million, up 1%
ABC: 7.85 million, down 6%
Fox: 7.06 million, down 20%
NBC: 6.96 million, down 6%
As you can see, Fox didn't just drop to second place behind CBS (NYSE:CBS), it fell off the cliff. The good news is even after a 22% drop, it still managed to hold on to second place in the key demographic, although it dropped to third in overall viewers. This definitely raises some flags as to what the performance of 21st Century Fox will be after the split. It comes in the wake of a solid performance over the last year for the company.
Still, Idol still has legs, and Fox will strengthen the judges panel in the next couple of months. It has also announced a new judges panel for The X Factor, which could help it return to better ratings.
The New News Corp.
There is no doubt people are wondering, other than to the benefit of 21st Century Fox, what the value of the new News Corp. would be. The company definitely could have received a good amount for some of the assets in their publishing arm; the most obvious being The Wall Street Journal.
While it's obvious what the value is of dropping what is considered by many as dead weight from the entertainment business of News Corp., there is something I like about this new company: The Wall Street Journal.
Before, the Journal may not have received the attention it deserved in the fold of News Corp. because it was hidden under the weight of the disparate properties held by the media giant. Now it may have a much larger, positive impact on this new News Corp., which could surprise many as to its results. If that's the case, this new company could surprise over time. And it's not like there isn't a lot of life left in the The Times and The Sun either.
This is one of the more interesting events this year to me. It really will give us a clear picture of whether or not both of these new companies will have added value unlocked in them via the separation. It appears this will be the case, although it remains to be seen with 21st Century Fox whether or not the latest season for the Fox network will have a detrimental impact on the company in the short term.
Since shareholders have been pushing for this so long, it seems there would be a nice bump in the stock in the near term just from momentum created from anticipation. After that we'll probably have some volatility.
The same could be the case for the new News Corp., although it depends upon if shareholders and investors view it primarily as an old media company, as represented by HarperCollins and newspapers, or a more modern company, as represented by the financial properties like The Wall Street Journal, which also has a strong Internet presence. If it's the former, then we could see it pull back when it starts to trade. If the latter, it also could get a nice boost.
To me, the bottom line is 21st Century Fox could really break out if it isn't dragged down too much by its TV lineup. If that is improved next season, we should see this company do really well.
For the new News Corp., this may be somewhat of a sleeper, as the strong properties included with it may influence the performance of the company more than it could under the larger former News Corp.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.