Media conglomerate News Corp (NWS) announced on Tuesday that it is considering separating its business into two separate entities. Presumably, the company will separate its publishing business, which includes Harper Collins publishing, The Wall Street Journal, The New York Post, Dow Jones publishing, and The Times (London) from its entertainment and other media businesses, which include Fox Broadcasting, Fox Sports and 20th Century Fox, among others. We think the deal could create value for shareholders. News Corp has been one of our better valuation calls, as we highlighted the firm as significant undervalued a number of months ago (click here for our stock reports).
Currently, the company is valued based on two completely different industries: publishing, which is a declining business; and media, which is growing at a faster rate. In fiscal year 2011, publishing revenue grew only 3% to $8.8 billion, which is 26% of the company's total revenue. However, this segment only produced operating margins of 9.7%. Contrast this to the cable and network programming segment, which grew revenue 14% to over $8 billion. But more importantly, this segment produced an operating margin of 34.3%. Television revenues grew about 13% and posted an operating margin of 15.2%.
Separating the business into two entities will allow investors to value each appropriately. Though cable and networking revenues are growing at 14%, with operating income up 22%, we forecast the company as a whole to only grow revenues 1% in fiscal year 2012. Additionally, the company has had to deal with negative backlash following the phone-hacking scandal at the now defunct News of the Word, and a split could alleviate fears investors may have of more scandals (or ring-fence them in the publishing entity).
Though Rupert Murdoch has been hesitant to break up his media empire, he and his family will retain control over both new companies. Nevertheless, we suspect Murdoch is not happy with a share price that is down 8% over the last five years. A split could be the catalyst shareholders have been waiting for. We think shares are fairly valued at current levels, but NewsCorp could converge to the higher-end of our fair value range ($25) following a split that forces the market to value each business separately.