Free of newspapers, 21st Century Fox shines

Tue Jul 2, 2013 4:26am IST

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(Reuters) - Wall Street rewarded Rupert Murdoch's move to create a separate entertainment company, giving 21st Century Fox (FOXA.O) one of the richest valuations in the media sector on its first day of trading.

Investors had waited for Murdoch to split News Corp, giving its cable, movie and equity stakes in pay-TV assets their own spotlight away from the publishing division.

The move is part of larger trend among media companies that are shedding print properties. Tribune announced on Monday it will acquire a stable of TV stations making it one of the largest local TV broadcasters while it seeks a possible sale of its newspapers.

21st Century Fox, which includes the Fox cable network, already has one of the highest valuations among its media peers based on 2013 price to earnings multiple. At 20.7 times, it is higher than Walt Disney (DIS.N), Viacom (VIAB.O) and Time Warner (TWX.N), and ranks second only to Discovery (DISCA.O) according to estimates from UBS analyst John Janedis.

Shares in the new 21st Century Fox entertainment operation gained over 2 percent on Monday, or $1.1 billion dollars in market value, from its opening price. Its market capitalization is about $68 billion, reflecting Monday's gain.

"By divesting its less attractive legacy business, Fox has become a pure-play entertainment company with fantastic assets in its cable channels," Gabelli & Co analyst Brett Harriss said.

In contrast, shares of the new News Corp (NWSA.O), which includes publishing assets like The Wall Street Journal and HarperCollins, and an education division, lost 3 percent, or half a billion, from their opening price. News Corp has a current market value of about $8.5 billion.

"News Corp is largely seen as ink on paper, and the perception is that the good assets, so to speak, went to Fox," said Gabelli & Co analyst Barry Lucas.

Evercore Partners analyst Alan Gould called the new Fox company one of the fastest-growing entertainment conglomerates. In a note to investors on Monday, he gave the stock an "overweight" rating and a $34 price target.

The stock is now trading at about 9.3 times earnings before interest, taxes, depreciation, and amortization (EBITDA), said Gabelli's Harriss. That compares with 7 times EBITDA before the split.

THE CHANCE TO DO IT AGAIN

Murdoch, who controls and is chairman of both companies, last summer announced his plans to separate his empire, bowing to some large shareholders who had long called for News Corp to shed its slower-growth newspaper assets.

The pressure to split had intensified after a phone-hacking scandal that involved News Corp's British tabloid newspapers. It sent shares of the company tumbling in the summer of 2011 and thwarted its deal to buy the rest of pay TV service BSkyB BSY.L.

Murdoch was effusive about prospects for News Corp when he met investors in May: "I have been given an extraordinary opportunity most people never get in their lifetime: the chance to do it all over again.

Still, the new publishing company will test investors' appetite for print assets.

"Broadly speaking, we are talking about a challenged industry for a host of reasons," said Lucas, who ticked off a litany of factors affecting the newspaper industry, including the drastic decline in lucrative classified advertising and a drop in circulation.

At News Corp, news and information make up the majority of revenue and earnings before interest, taxes, depreciation and amortization.

While the company also has pay TV assets and an equity stake in a real estate classified site in Australia, it is coming out as a separately traded company when advertisers are putting their dollars in digital products and other places besides newspapers.

Although News Corp, like other publishers, has digital media, advertising there commands lower prices than traditional print publications.

News Corp said in May that it would write down the value of its Australian and U.S. publishing assets by up to $1.4 billion.

Shareholders of the old News Corp received one share in the new publishing company for every four shares in what is now 21st Century Fox.

Shares of News Corp closed on Monday down 3 percent at $14.79, while 20th Century Fox gained 2.2 percent to $29.40. (Reporting by Jennifer Saba in New York; Editing by Leslie Adler, Lisa Von Ahn and Tim Dobbyn)

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