- News Corp shares reacted negatively to the threat of corporate charges against News UK. I believe that would actually be a positive catalyst.
- An Italian newspaper company is about to proceed with splitting its real estate from the newspaper operations. Such a transaction would create substantial value for the NY Times. Moreover this has a read-across for News Corp as the Chairman of the Italian newspaper is a board member of News Corp.
News Corp UK charges
The Telegraph reported that News UK could face corporate charges. That's quite interesting because one can wonder whether that's really a bad thing for News Corp. The company only discloses the profitability of its News and Information Services segment. However it doesn't break down UK from US and Australia.
Analysts believe News UK is making between $150m and $250m of EBITDA. Well in my mind News UK is loss-making. How do I get there? In the UK, companies need to report their accounts to Companies House. News UK has two companies. The first one is "Times Newspaper" (The Times and The Sunday Times). This company had losses of £28.7m in 2011/2012. The second one is "News Group Newspapers" (publisher of The Sun and the News of the World). This one had pre-tax profits of £88.6m 2009/2010 (which is the last year before the "News of the World" was shut down).
In the spin-off filing, News Corp mentioned that NOTW was making $122m EBITDA and hence that would imply close to breakeven for the Sun (deducting the $122m from the £88.6m). One would need to adjust for D&A and interest expenses which are unlikely to be high given that it is a subsidiary (no debt) of a newspaper company (limited D&A). From the prospectus:
"For the fiscal year ended June 30, 2012, Segment EBITDA at the News and Information Services segment decreased $214 million, or 19%, as compared to fiscal 2011, primarily due to the advertising and circulation revenue decreases noted above and the absence of $122 million in Segment EBITDA resulting from the shutdown of The News of the World, partially offset by the positive impact of cost saving initiatives at Dow Jones. In addition, fiscal 2011 included a litigation settlement charge of $125 million at the integrated marketing services business"
Naturally closing a loss-making business would be earnings accretive and have a positive impact on the valuation. But there is more to that: the liabilities would fall away. That might be the reason why News Corp issued a veiled threat in the Telegraph that its newspapers could be shut down in the UK leading to 46,000 job losses.
More profit, less legal liabilities - a good deal for investors.
The only legal liabilities remaining would be the US criminal ones (21st Century Fox indemnifies News Corp for the other ones). And there have been reports that these could be $850m or more. But the author of the article had a personal animosity against Murdoch and his articles should be treated with caution. $800m was the highest FCPA penalty ever.
An interesting Italian transaction with several takeaways
Fiat is increasing its stake in RCS Mediagroup to 20%. RCS is one of the major business newspaper in Italy (Corriere della Sera). The Fiat Chairman is John Elkann, heir of the Agnelli family. If you want my opinion, Fiat hasn't made any attractive cars since the Fiat 500 (not talking about their other brands like Ferrari). But they are very smart investors. They bought Chrysler on the cheap four years ago which made them a little fortune. So their investment in RCS Mediagroup could be seen as a potentially smart financial investment.
How could an Italian newspaper be a smart investment? For their assets - and this time specifically for the real estate.
That's particularly applicable to newspapers that have significantly reduced their workforce and have lower profitability. In that case, you are unlikely to keep your headquarters, particularly when your headquarters are located in the center of town. Indeed RCS is now looking to sell their real estate. And there is interest, starting with Blackstone.
1/ That's the same logic why an investment in the NY Times could work. And the thesis outlined previously continues to pan out: NY Times indeed sold the Boston Globe ($30m lower than rumored) and yields continue to go back up which reduces their pension liabilities.
2/ John Elkann, the Fiat Chairman increasing its stake in Italian newspaper RCS, is News Corp board member. So there is a realisation at the News Corp board level that newspapers can have value beyond their editorial content.
3/ As we had mentioned in a previous post, this ability to strip newspapers of their assets is applicable across the board. Take the Italian newspaper Caltagirone Editore for example (CED IM, EUR0.80 share price). They have prime real estate real estate worth EUR 0.50-1.00 per share. It has been suggested that they are preparing to convert newsrooms to an Armani store. And that's in addition to net cash of EUR 1.14 per share and listed equities of EUR 0.67 per share. Operationally, the newspapers have strong market shares in their regions and they could benefit as 100 newspapers close, they increased cover prices in February 2013, the company is buying back shares.
Additional disclosure: I am long CED.