June 29 (IFR) - Rarely does a company get spun off in the
generous manner that News Corp is considering for its publishing
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."
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
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
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
"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
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.
For other related fixed-income quotations, stories and
guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......