Murdoch's News Corp spinoff will be born with silver spoon

Fri Jun 29, 2012 9:16pm IST

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June 29 (IFR) - Rarely does a company get spun off in the generous manner that News Corp is considering for its publishing business.

Rupert Murdoch, chairman and CEO of News Corp, announced it will pursue plans to hive off its newspaper and book businesses by putting them in a new company, along with some other TV and education assets in Australia.

The company's shares soared as soon as rumors spread that it would soon be a pure play of TV, film and entertainment, cable and satellite assets, "which are really the only things anyone buys News Corp for," as one analyst puts it.

The move comes after a wave of negative headlines over the phone-hacking scandal in the UK, as well as a major culling of staff at its Australian arm, News Ltd, which is part of a major restructuring in a very challenging newspaper market.

Investors have called for the breakup for years, convinced that News Corp's TV other assets were effectively subsidizing its struggling newspaper businesses.

But Murdoch, a self-professed "newspaper man" who built his empire out of a string of local Australian papers, seems determined to give his publishing company the best possible chance of success, with a capital structure most other spin-offs can only dream of.

Rather than transferring debt to the new company, as most spinoffs take on by issuing new bonds to pay down parent debt, Murdoch said the new publishing company will start with as much as US$2bn of cash and no debt on its books.

"It will have positive cash flow from day one," Murdoch said in a television interview on Thursday. "And it will have no debt. It will also have cash reserves."

BORN FREE

The spinoff will thus be in a far stronger position than its peers to acquire smaller online print assets, and to weather what could be years before efforts to boost digital revenues overcome losses from newspaper advertising.

"Classified advertising is under enormous pressure, and the risk is that you cannot monetize digital properties in the way they were able to monetize the physical assets," said a media analyst at one of the ratings agencies.

"It is smart to spin off the publishing company as a net cash-positive entity with no debt," the analyst said. "It gives it a couple of years to see how things shake out in terms of digital advertising and revenues."

News Corp's share price has soared 25% this year on speculation of a breakup, and closed down slightly after Thursday's announcement at US$21.99.

Its bond spreads remained stable, but were now considered at their wides until the split takes place, in about a year.

Although News Corp's publishing segment was cash-flow positive in the 12 months to the end of March 2012, the segment's 14% contribution to EBITDA fell far short of the 40% of capital expenditure it's responsible for.

The publishing segment's EBITDA margin was 12% at the end of March, compared with 38.5% for cable, 17.9% for film and entertainment, 17.1% for television and 16.8% for satellite assets.

Once it is rid of its publishing assets, News Corp's margin will jump from 19.6% to 22.3%, according to Fitch.

Although News Corp will probably keep all of the US$15bn of debt - and forego US$1-US$2bn of its US$9bn of cash to fund the new spinoff - both Fitch and Moody's affirmed their current BBB-plus and Baa1 ratings and kept a stable outlook.

"The good thing about this plan is that News Corp is among the most financially flexible companies in the media industry, and can afford to give the spinoff company the best possible chance of success without harming the parent," said the ratings analyst.

Moody's expects the TV and entertainment assets to generate enough revenue in the next 12 months, that its debt to EBITDA leverage after the spinoff will be close to what it is today.

NOWHERE TO HIDE

Of course, some think that even with a capital structure, the publishing spinoff will not be able to escape the chronic downward trajectory of newsprint advertising.

Nor will the new entity, in which existing shareholders will be given stock, be able to hide its worst performing newspapers.

"However capitalized, we assume the stand-alone publishing company would be more subject to the market pressures," said Ken Doctor, a news industry analyst at publishing consulting firm Outsell.

"The creation of a news-plus-books company increases the performance pressure on these newspapers. No longer can their sub par performance be obscured in the larger News Corp," Doctor said.

Mergers and acquisitions are very likely at the new entity, according to Denver-based Wunderlich Securities, which thinks the spinoff is a positive for the publishing assets.

"Psychologically, we believe it is a huge positive for the print businesses, especially Dow Jones, to have the flexibility to earn their own laurels strategically rather than being viewed as ugly appendages to entertainment," they wrote in a note.

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