Australian-American media mogul Rupert Murdoch recently announced that he will split his company, media conglomerate News Corp (NASDAQ:NWS), into two companies, one housing its promising media business while the other retains its ailing publishing one. This strategy wasn’t surprising, considering that media giants The Walt Disney Company (NYSE:DIS) and Time Warner Inc (NYSE:TWX) have been relying on the growth of their film and televisions businesses, while print media companies such as The New York Times Company (NYSE:NYT) and The Washington Post Company (NYSE:WPO) have been struggling to stay relevant.
Yet for investors, the split will create a far more appealing company while shuffling all of its poorly performing assets into the other. How should investors play this split?
Third quarter revelations
During its third quarter, News Corp (NASDAQ:NWS)’s total revenue surged 13.5% year-on-year to $9.54 billion, while its earnings share fell a cent from the prior year quarter to $0.36. A breakdown of its top line reveals where all its money is coming from.
Business Segment | 3Q Revenue | Y-O-Y Change | % of Total Revenue |
Cable Network Programming | $2.78 billion | +17.1% | 29.1% |
Filmed Entertainment | $2.01 billion | +17.0% | 21.0% |
Publishing | $1.94 billion | -4.3% | 20.3% |
Direct Broadcast Satellite TV | $1.30 billion | +40.8% | 13.6% |
TV Stations | $1.23 billion | +1.4% | 12.9% |
Other | $279 million | +87.2% | 2.9% |
Source: News Corp. 3Q Report, author’s calculations
More than 75% of the company’s top line is generated by its film and television businesses. What’s more, its cable network segment accounts for 70% of the company’s operating income. Therefore, it makes perfect sense to separate its publishing business, which is lagging these other segments as an unrelated business, into its own company.
Old news is now new news
By the end of June, News Corp (NASDAQ:NWS). will split into two separately traded companies – News Corp (NASDAQ:NWS) and 21st Century Fox. News Corp. will retain its publishing business, which includes The Wall Street Journal, Barrons, The New York Post, The Times (UK), publishing house HarperCollins, and aplethora of newspaper publishers in Australia. Murdoch’s friend, Robert Thomson, will take over as the CEO of the new News Corp (NASDAQ:NWS) The board also authorized a $500 million stock buyback of new News Corp. shares after the split.
Meanwhile, Murdoch will stay on as the CEO of the newly formed 21st Century Fox. 21st Century Fox will house Fox, Star TV, MyNetworkTV, National Geographic, FX, Syfy, controlling interests in regional Sky networks, along with its film business, 20th Century Fox. Current News Corp (NASDAQ:NWS) investors will receive shares in both companies.
What this means for News Corp.
Although this split would streamline the focus of both companies, it also addresses major concerns raised by shareholders following the U.K. phone-hacking scandal in 2011. The subsequent investigation revealed that News Corp. journalists had hacked into voicemail accounts, disrupted criminal investigations, and even allegedly bribed members of the U.K. police force. This resulted in Murdoch discontinuing the 168-year old News of the World, which cost the company $42 million in litigation expenses during the quarter. The upcoming separation of the publishing business is expected to cost another $25 million.
Yet the phone-hacking scandal was only a symptom of the main problems facing the newspaper business – waning appeal and the desperation to use sensationalist tabloid stories to boost sales. In the U.K., News Corp. still owns
The Sun and The Times. The Sun and The Times were both once proper broadsheet news publications, but under Murdoch they both shifted to the cheaper tabloid format. Although The Sun still focuses on more sensational stories than The Times, many critics have claimed that the change in these two newspapers reflects a desire to appeal to the lowest common denominator to boost sales.
Last quarter, News Corp (NASDAQ:NWS)’s publishing segment’s operating income plunged from $130 million to $85 million, while its revenue slid 4.1%. By comparison, The New York Times Company (NYSE:NYT) reported a 93% plunge in profit last quarter, while its top line declined 2%. The Washington Post’s profit also fell 85% on a 4% decline in revenue. Both of these former publishing titans face the same problem that will confound new News Corp. shareholders – how can traditional newspapers remain relevant and profitable in the age of the Internet and freely distributed information?
Both companies have offered up similar plans for “paywalls” to force readers to pay for premium content, but the plans are yet unproven. Both The New York Times Company (NYSE:NYT) and The The Washington Post Company (NYSE:WPO) recently touted growth in their digital circulation, but let’s examine these numbers realistically through the lens of 21st century technology.
Daily Digital Circulation | Y-O-Y Growth | |
The New York Times | 676,000 | 49% |
The Boston Globe (The New York Times) | 32,000 | 50% |
The Washington Post | 1,097,500 | 41% |
Source: Quarterly reports
That year-on-year growth looks good, until you realize that, which is considered a primary source of Internet news, boasts nearly 35 million
unique visitors daily. This is dire news for shareholders of the new News Corp., which already posted similar top and bottom line declines last quarter.
Yet that doesn’t mean that it will be clear skies ahead for 21st Century Fox. Although all of Fox’s main media segments, except for its TV stations, reported robust double-digit growth last quarter, the film and television business is an unpredictable one.
Last quarter, Fox’s film entertainment segment’s 17% revenue growth far exceeded film studio revenue growth at both Time Warner (5.0%) and The Walt Disney Company (NYSE:DIS) (13%). However, Fox’s film business is still smaller than either Time Warner Inc (NYSE:TWX)’s Warner Bros. division or Walt The Walt Disney Company (NYSE:DIS)’s Studio division. Fox also owns fewer high-profile franchises than its rivals. Both Warner Bros. and Disney have been able to cash in heavily on the recent comic book movie craze, with their respective DC Comics and Marvel divisions.
Fox’s animation studio, which created Ice Age, also faces stiff competition from The Walt Disney Company (NYSE:DIS)’s Pixar, and Warner Bros. Animation division. However, last quarter Fox reported that strong box office sales of Life of Pi, Taken 2 and Ice Age: Continental Drift
all boosted the segment’s operating income by 2%, indicating that the threat of competition might be overblown.
In the cable networks business, Fox also reported stronger revenue growth (17%) than either The Walt Disney Company (NYSE:DIS)’s 6% gain at its media segment (ESPN, ABC), and 4% growth at Time Warner Inc (NYSE:TWX)’s cable networks (Turner Broadcasting, HBO). This clearly indicates that Fox’s cable networks are still in a younger growth stage than its primary competitors, which will be amplified by its strong position in satellite TV.
Lastly, Fox intends to grow its position in regional sports television, through its recent acquisitions and investments in Sports Time Ohio, Yankees Entertainment and Sports Network. This will solidify Fox’s position against The Walt Disney Company (NYSE:DIS)’s ESPN, which has a broader national focus. Fox also bought out the remaining 50% of its ESPN Star Sports joint venture with Disney, re-branding the network as Fox Star Sports Asia, which will lead into its launch of Fox Sports Japan. This dedicated focus on regional and international sports network expansion shows that it is eager to replicate Disney’s success with ESPN.
The Foolish Bottom Line
After all is said and done, it’s obvious which company investors should flock to – 21st Century Fox. By leaving its troubled print media business behind, 21st Century Fox has a chance to grow and flourish as an unchained rival to Time Warner, Disney, Comcast Corporation (NASDAQ:CMCSA), CBS Corporation (NYSE:CBS) and Viacom, Inc. (NASDAQ:VIAB). Meanwhile, shareholders of the new News Corp. should brace for slower growth and possible future litigation from its sensational tabloid news practices. Therefore, current shareholders would be wise to sell shares of the old News Corp. – which will simply become the new one – to purchase more shares of the newly formed 21st Century Fox instead.
The article How Should Investors Play the News Corp. Split? originally appeared on Fool.com is written by Leo Sun.
Leo Sun owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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