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The furor that has erupted in the UK surrounding phone hacking by employees at the News of The World and Sunday Times has now spread to ensare Scotland Yard. A number of major shareholders have said publicly "Get Rid of the newspapers!" Once that happens or is announced, they believe the shares would take off. In our view the crisis can't be fixed from a shareholder perspective by selling the newspapers. It is highly unlikely in the near term because the economics make no sense and because the liability of the behavior involved would remain. Therefore we see no catalyst to drive the shares higher and we think they tread water here at best for some time.

Here is News Corp's mix of businesses
(The company has yet to file its 2011.)

For the years ended June 30,

2010

2009

% Change

Change

Revenues:

Filmed Entertainment

$

7,631

5,936

28.6%

1,695

Television

4,228

4,051

4.4%

177

Cable Network Programming

7,038

6,131

14.8%

907

Direct Broadcast Satellite Television

3,802

3,760

1.1%

42

Integrated Marketing Services

1,192

1,168

2.1%

24

Newspapers and Information Services

6,087

5,858

3.9%

229

Book Publishing

1,269

1,141

11.2%

128

Other

1,531

2,378

-35.6%

(847

Total revenues

$

32,778

30,423

7.7%

2,355

Segment operating income (loss):

Filmed Entertainment

$

1,349

848

59.1%

501

Television

220

191

15.2%

29

Cable Network Programming

2,268

1,653

37.2%

615

Direct Broadcast Satellite Television

230

393

-41.5%

(163

Integrated Marketing Services

(151

353

NM

(504

Newspapers and Information Services

530

466

13.7%

64

Book Publishing

88

17

417.6%

71

Other

(575

(363

(212

Total segment operating income

$

3,959

3,558

11.3%

401

The newspaper segment includes the Australian papers, The NY Post and Dow Jones (The Wall Street Journal), as well as The Sun, The Sunday Times and The Times. We guess that the UK Newspapers generate about forty percent of segment operating income of $530 million.

News Corp Revenue

For the years ended June 30,

2010

2009

% Change

Change

Newspapers and Information Services

6,087

5,858

3.9%

229

% Total Revenue

18.6%

19.3%

Newspapers and Information Services

530

466

13.7%

64

Percent of Total Income

13.4%

13.1%

Of which we guess UK Newspapers account for 40% of sement income.

212

186.4

Value at 4 times

$848

$745.6

Value at 6 times

1272

1118.4

The value of these assets, before the impact of the liability associated with the investigation, should as a rough rule of thumb be about four to six times operating income. This would mean that a cash sale of the assets before taxes would be about $1 to $1.3 billion in proceeds before taxes. There very likely be some damages due the victims of the hacks--let's just pick a number of $100,000 to $500,000 per hack. Assuming the papers are correct that there were 4,000 people hacked, would suggest a half billion to $2 billion liability overhang. That liability will not go away even if the papers are sold.

There is little likelihood that any buyer would wish to be exposed to any liability in the acquisition of these papers. Indeed the valuation exercise about is highly speculative given the scandals. In our view, the company would be better off holding onto the newspapers and trying for the best settlement. We see no solution to the company's problems and to shareholder concerns in selling these assets. Again, our view is that NWSA Shares are dead money for a considerable period of time.

Source: Why Selling the U.K. Newspapers Won't End the News Corporation Crisis