News Corporation, the media empire controlled by Rupert Murdoch, has officially split into two separate companies. The entertainment arm which is more profitable will now be called 21st Century Fox while the publishing operation will continue to operate under the name of News Corporation. The publishing operation lost $2.1 billion in its last financial year and Mr. Murdoch says that the split will unlock hidden value for investors.
The publishing properties have been dragging down the overall profitability of the group and efforts to revamp the print operations have not been going as well as many shareholders had hoped. This split is also expected to shield the TV and film business from the scandal of phone-hacking at the British newspapers resulting in the closure of the News of the World. Rupert Murdoch will be chairman and chief executive of 21st Century Fox and executive chairman of News Corp, while sons James and Lachlan will be directors of both companies. Robert Thomson, formerly the managing editor of the Wall Street Journal will be chief executive of the News Corp publishing business. The two companies will start trading separately in New York under the names and ticker symbols Twenty-First Century Fox Inc. (NWSA) and News Corporation (FOXA).
The when issued trading indicates that the new News Corporation would have a market capitalization in the region of $9 billion and 21st Century Fox in the region of $67 billion. With annual revenues of $8 million and 24,000 employees, News Corporation will easily be the largest print media company in the United States. It could get even bigger because reports say that Rupert Murdoch may be interested in buying The Los Angeles Times from Tribune Co.
The rationale for the split
One reason for the split is that the industry itself in recent times has opted to cut down oversized conglomerates in order to achieve better focus. Viacom has spun off its television broadcasting businesses and Time Warner is spinning off its magazines. Pearson has divested businesses to focus on education and Vivendi is thought to be considering the sale of its telecom business in order to concentrate on entertainment. Investors are skeptical about the necessity of combining print media, television and films under the same umbrella and would much rather invest in companies which are sharply focused. There's another reason in the specific case of News Corporation and that is in the necessity of insulating its highly profitable TV and film operations from the consequences of the phone-hacking scandal which has cost the company almost $400 million in legal fees and associated costs. There is also a good chance that the split will allow 21st Century Fox to renew its offer to buy the 61% of the highly profitable BSkyB that it does not presently own.
The print media operations
It is now time for the print media operation to prove its worth. The owner of titles such as the Wall Street Journal, the New York Post and London's Sunday Times is on its own without the support of the entertainment business and the new CEO has promised stringent cost cutting and the single minded pursuit of profits. He said that efforts are being made for the Post to compete with growing sites like BuzzFeed. Estimates indicate that revenues will decline by about 4% to $7.7 billion in the coming year largely because of declining ad sales. The companies that are expected to show growth mostly fall under 21st Century Fox. Experts say that Murdoch who has consistently said that print media is a growth business has a lot to prove. The new News Corporation also has the advantage of starting with $2.6 billion in cash which will allow it pursue further acquisitions like the Los Angeles Times. The new publishing operations also include businesses in Australia that contribute more than 1/3 of the revenues and into the biggest Australian publisher, the cable network Fox Sports Australia; half ownership in the country's largest pay-TV operator, Foxtel, HarperCollins the book publishers, the British newspapers Times and Sun newspapers in the U.K. and Amplify, a digital-education business. The Australian assets have the capability to drive future growth and one estimate shows that real estate unit revenues will grow by 16% in the new fiscal year and Fox Sports Australia could grow by 7% in the same year.
The bottom line
The split will provide potential investors with a much more transparent scenario and the opportunity to focus their investment accordingly. I expect that the new News Corporation will start trading slowly but could gain momentum in the long term.