On June 21, 2013, Rupert Murdoch's News Corp. split into two units. The first piece of the company, now known as "20th Century Fox" (FOX), contains prized assets such as the Fox television network, Fox cable channels in the United States (including Fox News, Fox Sports, and FX), and the movie studio 20th Century Fox. The second piece of the company known as the "New News Corp" (NWSA)(NWS) contains (i) newspapers in America including the Wall Street Journal and New York Post, (ii) newspapers in Britain including The Times and the Sun, (iii) newspapers in Australia (7 of top 10 papers in country), (iv) several non-newspaper media assets in Australia (discussed below) and (v) the book publisher HarperCollins. Rupert Murdoch and News Corp. have been plagued in the last year by the "phone-hacking" scandal in London, and many investors may believe that the split of the company was an attempt by Murdoch to separate his good businesses from his tainted and slow-growing businesses. However, investment gurus such as Joel Greenblatt and Seth Klarman have preached that investors can profit handsomely by looking into unwanted or underappreciated spin-offs. In this article, I will examine 5 reasons that the New News Corp. can thrive in the long-run and reward shareholders in the process.
1) Rupert Murdoch is fully committed to New News Corp
Love him or hate him, Rupert Murdoch has made himself and his investors rich over the course of his career building News Corp. from a small Australian newspaper into one of the biggest media empires in the world. One of the reasons investors should look into the New News Corp. is that Murdoch is fully committed to growing this part of his empire. Murdoch along with the Murdoch Family Trust control approximately 78% of the voting shares (Class B) of the New News Corp, which together is worth approximately $2.5 billion. In a recent investor day conference, Murdoch spoke about the unconventional moves he has made in his career that turned out to be huge successes such as starting the Fox network when nobody thought a fourth network could compete with the "Big Three." (ii) starting SKY cable service in Britain when nobody said people would want more choices than offered by the BBC, and starting Fox News when nobody thought CNN could be overtaken. After discussing his previous unconventional success stories, Murdoch explained why he was so excited about working on the New News Corp. in spite of the negative views of many towards the newspaper business: "you may be wondering why I want to do it all over again. Well, the simple answer is there's just opportunity everywhere. The companies that make up the new News Corp. are some of the most extraordinary and brilliant brands in the world. Yes, some have their individual challenges, but they're undervalued and I believe underdeveloped." Despite being 82 years old, Murdoch has ambitious goals for this new company "My goal for the new News Corp. is to compress the success time line of the original News Corp. from 60 years to 10 years. You might think that's crazy. But back in the 1950s, we only had lead pencils and typewriters. Today, we have WiFi, 4G and digital compression." Assuming Murdoch can work effectively over the next 10 years given his age, investors can have one of the most brilliant business minds in the media business pursue the infinite opportunities he sees for their benefit.
2) The New News Corp. has No Debt, Lots of Cash, and is Trading for half of Book Value
Murdoch could have saddled the New News Corp. with lots of debt and unwanted liabilities, but he decided on the exact opposite route. The New News Corp. started its independent life with no debt and $2.6 billion in cash. This cash and flexibility should allow Murdoch to grow existing assets and acquire new assets without concern for short term liquidity issues. The company starts its life with $18.6 billion in assets and book value (since there is no debt). Given that the total market capitalization for both the Class A Shares and the Class B shares is approximately $9 billion, the shares are trading at approximately 50% of book value.
3) Liability from "phone hacking scandal" should not materially affect earnings
The negative headlines about the phone hacking scandal still linger in investor minds when thinking about the New News Corp's newspaper assets. However, the financial damage to the company should be limited. The company has already incurred $270 million in legal and professional fees related to the investigation and has paid out $27 million to claimants for civil settlements. As of March 31, 2013, management estimates that there is an additional $60 million of liability for claims that have been filed. However, potential investors should note that 20th Century Fox will have to indemnify the New News Corp. for any payments made after the separation of companies that arise out of civil claims and investigations relating to the phone-hacking scandal. So future liability for civil claims should not affect the New News Corp. in a negative way financially, but such liability may cause reputational damage.
4) Untapped Pricing Power of Wall Street Journal
Dow Jones, the publisher of the Wall Street Journal and Barron's, is a valuable property for the New News Corp. Rupert Murdoch bought Dow Jones in 2007 for $5 billion. Although newspapers have had a tough time with profitability as they transition online, the Wall Street Journal has been a pioneer in using paywalls to keep its customers paying premium subscriptions. The Wall Street Journal brand is tremendous, and in an age when most newspapers are struggling to maintain their identity, the Wall Street Journal has retained its title as the most important source of information for business people and wealthy individuals. My view is that this brand will be more valuable and profitable than most expect going forward, even in a paperless world. Management has stated that 43% of Wall Street Journal readers are millionaires who are willing to pay higher prices over time for the unique content provided by the gold standard in business journalism. I agree with the assessment that the Wall Street Journal has pricing power that is waiting to be tapped.
5) High Value, Non-Newspaper, Australian Media Assets
The New News Corp. includes some media assets in Australia that are very valuable but are not mentioned often by U.S. investors. First, the company now owns 50% of Foxtel, which is the leading pay-tv provider in Australia (2.3 million subscribers covering 30% of nation's population). Secondly, the company owns Fox Sports Australia which is Australia's leading sports broadcaster based on total subscribers. We can get a recent valuation of these assets because News Corp. recently paid $2.1 billion for half of these assets. Based on what the original News Corp. paid for 25% of Foxtel and 50% of Fox Sports Australia, the current market value of New News Corp's holdings in those entities can be estimated as $4.2 billion. The third major Australian media asset embedded in the New News Corp. is 61.6% ownership of a publicly traded Australian company named REA (ASX: REA) which is a leading digital advertising business specializing in real estate services. News Corp's stake in this business is currently valued at $2.46 billion. Together, these Australian media assets are worth $6.6 billion (or 73% of the total market capitalization of the company).
The New News Corp. is an interesting spin-off with some compelling reasons to invest. It has the taint of scandal from the phone-hacking scandal and the taint from being tied to the "dying" newspaper business. However, it has an exciting capital structure and very strong non-newspaper media assets in Australia. Considering that the company is trading at less than book value, has $2.6 billion of net cash, has some valuable properties (newspaper and non-newspaper), the shares of News Corp. have a built-in margin of safety. By investing in the New News Corp, you are betting that Rupert Murdoch's capital allocation skills in the media business can enrich shareholders. Based on his track record and vigorous excitement at age 82, I think it might be a good idea to invest alongside him.
I think the most important risks to think about when considering this investment are the following: the newspaper businesses become obsolete or money-losing over time as internet sources replace the information needs of consumers, (ii) Murdoch pays overly extravagant prices for media properties such as Myspace, which turn out to be a big waste of shareholder money, Murdoch passes away and the successor does not have as much experience or capability in building shareholder value, (iv) the pay-cable business in Australia starts to face threats from competing sources of television entertainment, and the phone-hacking scandal causes reputational damage to the London newspapers and other New News Corp. properties.