News Corp. Rising 32% With News-Entertainment Breakup: Real M&A
By taking the entertainment out of the news, Rupert Murdoch can boost returns for News Corp. shareholders by at least 32 percent.
News Corp., run by the 81-year-old Murdoch, said it is considering splitting the $53 billion media company. Murdoch is overseeing talks on whether to separate the Fox cable networks, television and movie businesses from publishing, which contains the Wall Street Journal and HarperCollins, people familiar with the situation said. After rising 8.3 percent on the news, News Corp. is still valued at an almost 10 percent discount to media stocks versus earnings, according to data compiled by Bloomberg.
While phone-hacking revelations at its U.K. newspapers thwarted Murdoch’s plan to take over British Sky Broadcasting Group Plc (BSY) and regulators are considering whether News Corp. (NWSA) should be allowed to keep its investment in Britain’s biggest pay-TV operator, the company is worth $70 billion to $77 billion by valuing its businesses separately, according to Gabelli & Co. and BMO Capital Markets. The entertainment units could command as much as News Corp.’s current market value, Gabelli said.
“News Corp. is cheap,” Brett Harriss, an analyst for Gabelli in Rye, New York, said in a telephone interview. Gabelli is a unit of Gamco Investors Inc., which oversees about $37 billion and held News Corp. stock as of March 31. A breakup could increase “value by separating out the ‘old, bad’ business from what’s seen as the good businesses.”
Today, News Corp. rose to the highest price since October 2007, adding 2.5 percent to $22.31 a share.
Dan Berger, a spokesman for New York-based News Corp., declined to comment beyond the company’s statement on June 26.
In it, News Corp. said it is considering separating itself into two publicly traded companies, without saying how it would be divided. The talks to separate News Corp. are at a late stage, according to one of the people familiar with the matter, who asked not to be identified because a decision isn’t final.
Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
Chief Operating Officer Chase Carey said in February that executives discussed a breakup following the U.K. scandal where tabloid journalists hacked into the phones of politicians and celebrities for exclusive stories.
Police probes led to more than 50 arrests, including former News of the World editors Rebekah Brooks and Andy Coulson, once the communications chief of U.K. Prime Minister David Cameron. News Corp. closed the Sunday tabloid in July last year and later replaced it with a Sunday edition of the weekly Sun tabloid.
The potential split of the company also comes as U.K. regulator Ofcom considers whether News Corp. should be allowed to keep its 39 percent stake in BSkyB, which was led by Murdoch’s son James for almost a decade.
Ofcom, which has said News Corp.’s holding gives it “material influence” over BSkyB, is probing whether News Corp. and its directors are fit to hold a broadcasting license.
A U.K. committee, after investigating whether News Corp. misled Parliament in the phone-hacking scandal, said last month that Murdoch is “not a fit person to exercise the stewardship of a major international company.”
Reports of a possible breakup pushed News Corp. to its biggest gain in almost a year yesterday, data compiled by Bloomberg show. Even with the gain, News Corp. is valued at 14.9 times earnings, versus 16.4 times for the Bloomberg World Media Index. (BWMEDA) Since the scandal broke last year, News Corp. has traded at a discount of as much as 25 percent to its media rivals.
One reason that News Corp. doesn’t command a higher valuation is because growth at its publishing unit has lagged behind the rest of the company, according to Marci Ryvicker, a New York-based analyst for Wells Fargo & Co.
Revenue from the publishing division, which includes businesses from newspapers to advertising, rose less than 1 percent in the past three years. Sales from News Corp.’s television, movies and satellite businesses combined climbed 10 percent in that span, data compiled by Bloomberg show.
The publishing unit also generated 13 percent of the company’s $5.5 billion of operating income in the past year, even after accounting for a quarter of News Corp.’s $34.3 billion of revenue, the data show.
“There’s more value in core News Corp. without the publishing assets,” Ryvicker said. “Newspapers in general have been in a secular decline. If you put all these secular issues and litigation in another vehicle, you get a much higher growth company. That’s where we see a lot of the upside.”
By applying market valuations to each of News Corp.’s units, the company is worth about $70 billion, according to a sum-of-the-parts analysis by Gabelli’s Harriss.
News Corp.’s cable network business, which Harriss values at 9 times earnings before interest, taxes, depreciation and amortization this fiscal year, would be worth about $32 billion.
The company’s film, TV and satellite units together would sell for $21 billion, and News Corp. also has almost $16 billion in investments, based on his projections.
Excluding News Corp.’s estimated net debt this fiscal year and the value of the investments, the company’s entertainment businesses -- without the newspaper unit -- would still exceed $52 billion, the data show. On a per-share basis, Harriss says all the media conglomerate’s pieces would add up to $29, about a third more than its price of $21.76 yesterday.
Jeffrey Logsdon, an analyst at BMO Capital in Los Angeles, is even more bullish, and says the value of News Corp.’s businesses may exceed $32 a share.
“It’s worth much more” than the company’s current price, he said. “Somebody’s punishing these guys if they’re taking the multiple down because of them owning the publishing business.”
Murdoch can look to Sumner Redstone’s decision to split Viacom (VIAB) Inc. into two companies -- CBS Corp. and a new Viacom Inc. -- more than six years ago.
Since the end of 2005, CBS, which owns radio and TV networks, rose 31 percent, data compiled by Bloomberg show. Viacom, which controls MTV, Comedy Central, Nickelodeon and the Paramount film studio, climbed 12 percent. The Standard & Poor’s 500 Index, the benchmark gauge of American common equity, gained 5.7 percent over the same span.
“If they can isolate the publishing assets and the liabilities associated with the phone-hacking investigation, theoretically it should result in a revaluation of the remaining media assets,” Jaison Blair, a New York-based analyst at Telsey Advisory Group, said in a telephone interview. For investors, “this is one step in the opportunistic chain.”
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