News Corp.’s Print Loss Is Bondholders’ Gain
News Corp. bondholders are poised to benefit as Rupert Murdoch prepares to cleave a debt-free publishing arm from his entertainment business even as they lose a quarter of the company’s revenue.
News Corp.’s 6.15 percent bonds maturing in 2041 reached the highest level since February after the New York-based parent of the Fox film studio and the Wall Street Journal said it plans to split into two publicly traded companies. The new publishing company will have “good, positive cash flow, and it will have no debt,” Murdoch, 81, said yesterday in a Bloomberg Television interview with Betty Liu.
“The stuff that’s going to stay at News Corp. for the long term is a much better credit than what’s going off into the publishing arm,” Monica Erickson, a Los Angeles-based money manager and credit analyst at DoubleLine Capital LP, which oversees $37.5 billion and owns News Corp. (NWSA) debt, said in a telephone interview. “Long-term, it’s a good move for the credit.”
While removing the publishing assets without shifting any of the $15 billion of bonds may raise the entertainment unit’s ratio of total debt to earnings before interest, taxes, depreciation and amortization to the highest level since 2009, Moody’s Investors Service said the proposed breakup doesn’t endanger News Corp.’s investment-grade rating.
Though executives haven’t made final decisions on capital structure, leaving the company’s obligations with the entertainment unit is “a reasonable assumption,” Murdoch said in the television interview.
News Corp.’s $1.5 billion of 6.15 percent notes rose to 119.45 cents on the dollar yesterday, the highest since Feb. 29, before trading at 118.7 cents to yield 4.92 percent at 8:05 a.m., according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its 6.2 percent bonds due 2034 also rose to an almost four-month high to yield 5.08 percent yesterday.
The extra yield investors demand to own News Corp.’s debt instead of government securities has tightened 16 basis points since May 31 to 2.64 percentage points, according to Bank of America Merrill Lynch index data. That compares with a 7 basis- point decline to 2.01 percentage points for industry peers, the data show.
“Bondholders may be feeling a bit liberated,” Alex Diaz- Matos, an analyst at Covenant Review LLC in New York, said in a telephone interview. “They could be viewing the newspaper business as more a drain on the enterprise, and bond prices likely reflect that.”
Shareholders have also gained. News Corp. added $4 billion to its market value this week and traded at $22.05 at 1:03 p.m., up 15 percent from the end of May.
Murdoch, projected optimism for the publishing group in a telephone interview yesterday, suggesting that news is a valuable commodity and mobile devices such as Apple Inc.’s iPad and Amazon.com Inc.’s Kindle Fire will create new revenue sources. While the company will cut jobs at its Australian newspapers, overall he’s looking to invest in the business to make it grow.
“Our publishing business is more valuable than people give us credit for,” Murdoch said. “There are great digital opportunities in publishing, and net-net, around the world, we’ll be increasing our numbers and increasing our costs and hopefully increasing revenues as well.”
Murdoch said Dow Jones & Co., the publisher of the Wall Street Journal, will be the “center of this whole thing.”
“We think the Wall Street Journal, which we may call the WSJ, will be a really great global brand,” Murdoch said on CNBC yesterday.
While News Corp.’s publishing arm accounted for 17.8 percent of the company’s operating income in its last fiscal year, up 6 percentage points from 2010, the measure has dropped from about 50 percent in 2001, data compiled by Bloomberg show. Publishing revenue at $8.83 billion, which includes sales from the New York Post and the London-based Times, hasn’t exceeded a growth rate of 5 percent since the fiscal year ended June 2008.
Sales from cable programming, which includes the Fox News channel, Fox Sports and FX, have increased by more than 14 percent in each of the last five years to $8 billion in 2011, the data show.
“You’re getting rid of a slow-growth, lower-margin business that’s got secular issues,” Karen Klapper, an analyst at CreditSights Inc. in New York, said in a telephone interview. “It’s still giving you cash, but that cash is shrinking, and if they’re going to truly embrace the digital world it’s going to require a lot of investment to get there.”
Newspaper publishers are struggling with declining revenue as readers migrate to Internet news sources, which often are provided for free and aggregated by companies such as Google Inc., operator of the world’s largest Web search engine.
News Corp. is also the subject of government investigations by U.K. and U.S. regulators, amid allegations that its journalists hacked phones and bribed police, that may impair its financial condition, the company said in an Aug. 15 regulatory filing.
The publishing business represents 43 percent of News Corp.’s $1.2 billion of capital expenditures in 2011, the biggest portion since 2007 and most of any unit, Bloomberg data show.
“The transaction will result in an improved operating profile at RemainCo, given the divestiture of the company’s lowest-margin, most capital intensive, and secularly challenged business,” Fitch Ratings said in a report that affirmed News Corp.’s BBB+ rating with a stable outlook. RemainCo refers to the units not being divested.
Even “the most adverse scenario” for bondholders, under which all the company’s debt remains at News Corp. with the spun-off publishing arm receiving $1 billion to $2 billion of cash, won’t endanger the company’s Baa1 credit rating, Moody’s analyst Neil Begley wrote yesterday in a report. Baa1 is three levels above junk grade and equivalent to BBB+.
The transaction may increase News Corp.’s debt to Ebitda ratio to 3 times including adjustments, Moody’s said. That compares with 2.25 times in the most recent quarter and would be the highest level since 2009, Bloomberg data show.
While the spinoff doesn’t ease the risks of liabilities linked to the company’s phone-hacking scandal, leverage should decline as earnings at the remaining entertainment businesses expand, according to Michael Altberg, an analyst at Standard & Poor’s who rates News Corp. BBB+ with a “negative” outlook.
Revelations a year ago that journalists at News Corp.’s News of the World tabloid accessed phone messages of murdered schoolgirl Milly Dowler in 2002 led to a public outcry prompting the closing of what was then Britain’s biggest-selling newspaper.
The scandal also spurred more than 50 arrests and a finding by Parliament’s House of Commons Culture Committee that Murdoch is “not a fit person to exercise the stewardship of a major international company.”
News Corp., which generated more free cash during the past 12 months than in any other year, will still benefit bondholders after losing the publishing business by maintaining a “very strong” ability to produce the funds used to reward shareholders through dividends or stock buybacks, to reinvest in the company, or to pay down debt, said Dave Novosel of Gimme Credit LLC.
“In the long term, you’re going to have a better credit profile in terms of the cash flows that would more than offset the near-term bump in leverage,” Novosel, a senior analyst at the bond research firm in Chicago, said in a telephone interview. “You’re losing some of the Ebitda, but you’re going to lose the cap-ex too, which obviously bodes well for the remaining operation.”
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