By
Diane
Mermigas
:
News Corp.'s (
NWS
) decision to throw its publishing operations under the bus in a
division of assets is a shortsighted effort to pacify shareholders
disgruntled with a year-long
phone-hacking scandal
in Britain and declining stock price that could blunt the
newspapers' digital survival.
Is it realistic to expect a pure-play publishing company to do
more experimenting with digital business models than it does now?
News Corp. Chairman Rupert Murdoch promises the standalone entity
will have "a robust net cash position" for potential acquisitions.
But where will the investment funds come from?
News Corp. chairman Rupert Murdoch, who has been loath to
spin-off his beloved newspaper operations, says the stand-alone
entity will have "a robust net cash position" for potential
acquisitions.
Nomura Securities analyst Michael Nathanson estimates the
publishing business will have $362 million in profit in fiscal 2012
and a value of about $2.6 billion, or 7% of News Corp.'s current
market cap. By comparison, News Corporation's entertainment
business will earn $3.1 billion in fiscal 2012 and could be the
highest-growth portfolio in media, valued at about $52.5 billion -
nearly the same as the existing company.
Barclay's Anthony DeClemente expects as much as $2 billion of
News Corp.'s estimated $11 billion in cash will go with publishing
to mitigate $1.5 billion in debt and an estimated $330 million in
phone hacking-related legal expenses. Even with double-digit
declines in EBITDA, BTIG analyst Richard Greenfield expects
publishing free cash flow to remain positive in fiscal 2015.
Still, those numbers speak more to getting by than getting
on.
The publishing company will not likely seek another $5 billion
deal like its purchase of
Dow Jones
in 2007, which was heavily written down and whose estimated value
has deteriorated. But it will need to continuously invest in
innovative digital applications and business models to better
monetize its unique data and information.
The
WSJ
, as it is expected to be rebranded, is aggressively making
variations of its content available to users through their device
of choice to avoid the huge reader exodus spurred by
The Times of London
's hard pay wall tactics.
Wall Street Journal
readers can "subscribe" for a few dollars a month to specific news
channels through premium sources, such as Water Cooler, the
Political Report and the Technology Digest in a unique
revenue-sharing arrangement between Dow Jones, aggregator Pulse and
Apple, which demands about one-third of money generated from apps
on its devices.
The Daily
experiment is a mobile digital-only newspaper app designed for the
iPad and other tablets that allows automatically renewable
subscriptions as an alternative to a browse-easy site. Despite
missing News Corp.'s internal targets, the $30 million-plus venture
is a
valuable learning experience in mobile and digital
information
innovation that is not likely to be repeated in a publishing entity
trying to go it alone.
Last week, Chase Carey, News Corp.'s COO supportive of the
split, said the free-standing publishing operations will have "the
impetus to grow and fulfill their potential "without explaining
where sustainable investment funds would come from.
With the newspapers' losses more nakedly evident, innovation and
measured risks will be more crucial ... and less likely under the
new scenario.
Some industry analysts believe News Corp.'s publishing
operations will falter without the economic safety net provided the
company's thriving entertainment assets. While the split may not
exacerbate the steady streaming and downsizing of the newspapers'
daily operations, they will no longer have ready access to News
Corp.'s digital resources to support new revenue streams.
E. W. Scripps and Viacom-CBS are examples of companies that spun
off faster from slower-growing media assets only to have the
traditional newspaper (and broadcast) entities lag behind.
While investors applaud the 9% run-up in News Corp. stock, the
future of the company's print operations remains uncertain.
Existing investors will share in that uncertainty with one share of
stock in the publishing company for every News Corp. share they own
in the anticipated slowdown in an ongoing $10 billion stock buyback
plan.
Gains from the entertainment assets' freedom from the so-called
"Murdoch discount" will be offset by losses at a free-standing
publishing enterprise.
In the nine months through March, the combined cable channel, TV
station, satellite TV and movie businesses saw revenue rise 9% to
$18.66 billion. Operating profit rose 23% to $4.17 billion. The
proof is in the numbers. News Corp.'s shrinking publishing revenues
declined 4% to $6.22 billion over the same period while operating
profits slipped 22% to $458 million.
Little wonder management is considering ways to make the
publishing company less vulnerable by incorporating News Corp.'s
education division, the HarperCollins book business, possible
acquisitions, such as Monster.com, and Australian assets, including
the planned $2 billion acquisition of Consolidated Media Holdings
(with TV operator Foxtel and Fox Sports Australia).
News Corp.'s 39% stake in BSkyB remains with its entertainment
assets, even as UK regulator's debate its fate after foiling the
company's proposed $12 billion buyout of the satellite
provider.
The proposed spinoff is counterintuitive to media's rapid
integration of content, advertising and commerce. The lack of
synergies notwithstanding, the chances of their successful
reinvention are better as an appendage -rather than a distant
relation - to News Corp.'s core entertainment assets: cable
channels like FX and Fox News, the 20th Century Fox studio and Fox
Broadcasting.
Like other publishers struggling to find their way, News Corp.
has barely scratched the surface of ways to slice, dice and smartly
broker its information and data for multi-dimensional consumers
with as diverse needs and interests.
"Newspapers, once the bastions of content creation and curation,
will experience their fifth straight year of declining revenue. How
does one create differentiated content in an economically viable
manner when so few want to pay for it?" asked Internet guru and
Kleiner Perkins partner Mary Meeker. That also includes
advertisers, with print barely commanding 8% of consumer time spent
with media and a rapidly declining 27% of advertiser dollars.
News Corp.'s standalone publishing enterprise is unlikely to
answer that question.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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