News Corp. Spinoff Forces Publishing Arm to Prove GrowthEdmund Lee
Rupert Murdoch bowed to investor pressure to split his six-decade-old publishing business from the rest of News Corp.’s media empire. Now it’s time for the newspaper unit to prove it can make it on its own.
The publishing unit, owner of the Wall Street Journal, New York Post and London’s Sunday Times, officially became independent today, losing the backing of News Corp.’s entertainment business as it pursues growth in a declining industry. The newspaper company, which kept the News Corp. name, is valued at about $8.9 billion -- a seventh the level of entertainment business, which is now called 21st Century Fox.
Sales at News Corp.’s historical publishing division will drop 4 percent to about $7.72 billion in the year starting July 1, largely due to shrinking newspaper ad sales, estimates Richard Greenfield, an analyst at BTIG LLC. That compares with a 9.9 percent gain, to $30.2 billion, for businesses that mostly belong to 21st Century Fox. The disparity illustrates why investors pushed Murdoch to unshackle the two businesses, a move he agreed to in 2012 after years of resistance.
“When the company announced they were splitting in two, people labeled it ‘good News Corp.’ and ‘bad News Corp.,’” New York-based Greenfield said in an interview. “Rupert has a belief this will be a growth business, and he’s got a lot to prove.”
Starting July 1, the two companies will trade under the tickers NWSA and FOXA. The voting Class B shares go by NWS and FOX. Investors got an early look at the spinoff last week when the stocks began trading on a when-issued basis.
The new News Corp.’s non-voting Class A shares, trading under the ticker NWSAV, fell 1.6 percent to $15.25 at the close today in New York, implying a market value of about $8.9 billion. 21st Century Fox, trading with the FOXAV ticker, added less than 1 percent to $28.99, for a market value of about $67 billion.
While the new News Corp. will be a fraction the size of the old combined company, it still will be the largest newspaper company in the U.S. Gannett Co., publisher of USA Today and more than 80 other daily papers, has a market value of $5.6 billion while the New York Times Co. is worth $1.64 billion.
The new News Corp. will generate pro forma earnings before interest, taxes, depreciation and amortization of about $1.07 billion in the year ending this month, estimates Todd Juenger, an analyst with Sanford C. Bernstein & Co.
Based on that estimate and trading in the when-issued stock, investors are assigning the company an enterprise value of about 5.9 times Ebitda, compared with a multiple of 6.3 for Gannett and 6.7 for the New York Times, according to data compiled by Bloomberg and Bernstein Research.
Starting off with $2.6 billion in cash allows News Corp. to aggressively pursue deals. Murdoch has expressed interest in buying the Los Angeles Times, owned by Tribune Co., people familiar with his thinking told Bloomberg News in March.
The split allows for a cleaner, more transparent strategy when investing in the new companies, according to Matthew Harrigan, an analyst with Wunderlich Securities Inc. in Denver, Colorado.
“I’m a big believer in the pure play,” Harrigan said in an interview. “I think the print side will start off a little sloppy in the trades, but over time, if you’re patient this could work out.”
In addition to the Journal, the Times and the Post, the new publishing group includes Australian businesses that make up more than a third of annual sales. They include Australia’s biggest newspaper publisher; the cable network Fox Sports Australia; half ownership in the country’s largest pay-television operator, Foxtel; and REA Group, an online real-estate listings service.
HarperCollins book publishers, the Times and Sun newspapers in the U.K. and Amplify, a digital-education business led by former New York City schools chancellor Joel Klein, round out the portfolio.
The Australian assets have the potential to be growth drivers for the new company, according to Juenger. He estimates sales at the real-estate unit will rise 16 percent to $399 million in the fiscal year that starts July 1, while Fox Sports Australia will see a 7 percent sales gain to $556 million in the same period.
Sales at the newspaper unit, which includes database and newswire operations at Dow Jones & Co., publisher of the Journal, are expected to decline 2.4 percent to $6.56 billion, while accounting for more than 72 percent of total News Corp. sales, Juenger estimates.
Robert Thomson, who will be chief executive officer of the publishing group, promised investors last month that the company would be “relentless in our cost cutting and in our pursuit of profits.” News Corp. last month wrote down the value of its publishing business by as much as $1.4 billion, blaming slowing cash flow from its Australian and U.S. newspapers.
Lex Fenwick, CEO of Dow Jones, said he plans to refocus the company’s efforts on selling news and data services to business customers at higher subscription rates. Fenwick, a former CEO at Bloomberg LP, said Dow Jones can charge higher subscription fees given the large array of new services it plans to build, including a private messaging application.
“We know how to do this business,” he told investors last month. “We know how to build these products. We know how to provide customer service and we know, or we think we know how to sell.”
News Corp. competes with units of Bloomberg LP, owner of Bloomberg News, in selling financial news and information.
The new News Corp. has the approval to buy back $500 million worth of stock after the split.
Investors get one share in the publisher for every four they already held in the old company, which owns the entertainment assets and adopted the 21st Century Fox name. Shareholders backed the spinoff at a meeting this month.