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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
