A historic day is coming for News Corp (NASDAQ:NWS) and its chairman and CEO Robert Murdoch. The company decided to split itself into two pieces: a newspaper business with the old name of News Corp, and an entertainment business with the new name of 21st Century Fox. I personally think that spinoffs and business separations are interesting as they present a really valuable source of investing opportunities. Of course, the attractiveness of a spinoff depends on the fundamentals of the core business and the price tag it carries as well. Let’s take a closer look to determine which is better for investors, the new News Corp or 21st Century Fox?
News Corp is cheap
The new News Corp, as a publishing business, will still own some prestige assets including the Wall Street Journal, London’s Sunday Times, the New York Post and book publisher HarperCollins. Moreover, it also possesses the sports programming and pay-TV distribution in Australia for Fox Sports. For the nine months ending in March, News Corp (NASDAQ:NWS) generated $6.83 billion in revenue and only $174 million pre-tax income. The net income attributable to the new News Corp came in at only $84 million, or $0.14 per share. The EBITDA (earnings before interest, taxes, depreciation and amortization) was much higher at $756 million. The much lower income compared to EBITDA was due to high levels of depreciation and amortization and impairment and restructuring charges.
What might make investors like the new News Corp (NASDAQ:NWS) is its strong debt-free balance sheet. As of March 2013, it had nearly $12.6 billion in equity, nearly $1.54 billion in cash, $2.85 billion in investments and no debt. It also recorded nearly $1.15 billion in deferred income taxes, which could be considered an interest-free loan from the government. At $15 per share, the new News Corp is worth around $8.6 billion on the market. The market values the new News Corp quite cheaply at only around 3.8 times its pro-forma 2012 EBITDA and 1.4 times its tangible book value (including nearly $6.5 billion in goodwill and intangible assets.)
The higher growth entertainment business
21st Century Fox will be a much higher-growth business, operating in several segments including cable and television, filmed entertainment and direct satellite broadcasting. In fiscal 2012, the company generated around $25 billion in revenue and nearly $3 billion in profit from continuing operations, or $1.20 per share. As of Dec. 2012, the company recorded more than $14.4 billion in equity, $5.25 billion in cash, $4.13 billion in investments and only $3.52 billion in debt. It’s worth noting, however, that 21st Century Fox also had quite a large amount of goodwill and intangible assets at more than $16.6 billion. Consequently, the business had a negative tangible book value at nearly $(2.2) billion. 21st Century Fox is trading at around $29.20 per share, with a much larger market cap than News Corp of about $68.10 billion. In 2012, its EBITDA came in at around $5.38 billion. Consequently, the market values 21st Century Fox at a much higher valuation, at around 12.3 times its 2012 EBITDA.
