21st Century Fox: News Corp. surges on split hopesJune 26, 2012: 4:01 PM ET
Should News Corp. split up into two companies? Did The News of the World hack into people's voicemails?
Of course, News Corp. (NWSA) should break up. News Corp. confirmed Tuesday morning that is considering a restructuring following reports in Tuesday's News Corp.-owned Wall Street Journal and the Dealbook blog of The New York Times about a possible split.
Shareholders clearly are voicing their approval of the proposed plan. News Corp. shares rose more than 8% Tuesday, hitting a new 52-week high in the process.
Even though News Corp.'s stock has done well lately, rising 13% YTD, prior to Tuesday's big run-up, it has lagged the performance of some of its key rivals, most notably Walt Disney (DIS) and NBC Universal owner Comcast (CMCSA).
Some argue that News Corp. has been weighed down a bit by the tabloid problems and that if not for a hefty $5 billion share buyback program by News Corp. that's essentially served as a bone for angry investors to gnaw on, the stock could be doing worse.
Investors have been clamoring for years for the Rupert Murdoch-controlled media conglomerate to find a way to separate its slow growth publishing divisions from its sexier movie, broadcast television and cable network businesses. News Corp. has experimented with such a model before. It actually did spin-off a small portion of Fox back in 1998 but bought it back in 2005 after News Corp. reincorporated from Australia to the U.S.
As I've written on numerous occasions even before the company's U.K. tabloid scandal first came to light, the newspaper and book units make up a small portion of News Corp.'s overall revenue and profits but account for a disproportionately large amount of PR headaches. (My 2009 book Inside Rupert's Brain details Murdoch's obsession with the printed medium despite Wall Street's continued dissatisfaction with newspapers.)>
If News Corp. does split, it would be a victory of sorts for Murdoch since he would at least be able to hold on to the dead tree business that he grew up in and still clearly adores. A break-up would be similar to what fellow octogenarian media mogul Sumner Redstone has done with CBS (CBS) and Viacom (VIAB). It would allow Murdoch to remain in control of the newspapers instead of selling them off to a rival media firm or private equity shop as some (like me) have suggested he do.
Redstone spun-off CBS, which owns the flagship broadcast network, a massive radio and outdoor advertising business, the Showtime cable network and Simon & Schuster publishing unit, from Viacom, the parent of cable channels Nickelodeon, MTV, BET, Comedy Central and the Paramount movie studio, in late 2005.
But separating Fox from the rest of News Corp. would also be an admission by Murdoch that his strategic vision of a unified company that controls virtually all forms of media has failed. It may even prompt shareholders of CBS and CNNMoney parent Time Warner (TWX) to push those companies for a sale or spin-off of their own publishing assets.
Murdoch, as he often does, defied conventional wisdom by overspending on Dow Jones a few years ago. Clearly, he was thinking more about his ego, the allure of owning one of the best journalism brands in the world, than he was about shareholder returns. Wall Street doesn't care about prestige. It cares about profits.
And if News Corp. does wind up setting up a new company for the Fox TV network, News Corp.'s various cable channels, international satellite broadcasting assets and the movie studio, it seems almost certain that investors will attach a much higher earnings multiple to Fox than it will to what I'll dub "old" News Corp. -- a unit that would house The Wall Street Journal, The New York Post, all the controversial U.K. tabloids and the HarperCollins book publisher.
News Corp. as a whole currently trades at about 12 times fiscal 2013 earnings estimates. That is a discount to Disney and Comcast. But a separate Fox might be valued closer to the 14 times estimates that Disney and Comcast are fetching since Fox has more growth potential.
Separating Fox from the newspapers also would eliminate some concerns about a so-called Murdoch discount due to his incessant wheeling and dealing. If "old" News Corp. wanted to buy even more newspapers, Fox investors wouldn't have to be penalized.
But the "old" News Corp. could get saddled with a single-digit P/E ratio, which might be a humbling moment for Murdoch. Consider that The New York Times (NYT) is trading at only 10 times 2013 earnings estimates --- and that makes it one of the priciest in the publishing group. USA Today owner Gannett (GCI) is valued at just 6 times 2013 earnings estimates while McClatchy (MNI) is valued at a woeful 4 times 2013 profit forecasts.
Nonetheless, Murdoch probably realizes that he must set the stage for a future transition of power at the company -- and a split may be the easiest way to do that. Chase Carey, the widely respected (and awesomely-moustachioed) COO of News Corp. and a former CEO of DirecTV (DTV), is the perfect person to lead a standalone Fox unit that wouldn't have to deal with pesky little distractions like Parliamentary hearings and the Internet devouring the centuries-old publishing business model.
It does beg the question about who eventually could succeed Murdoch as CEO of "old" News Corp. though. On the one hand, it's laughable to suggest that son James would be anointed with that task given his role in the hacking scandal. Then again, investors might not care as much if James were only named to lead the much smaller "old" News Corp. After all, most growth-oriented investors would probably be more interested in owning Fox than "old" News Corp.
And look on the bright side. Warren Buffett still loves newspapers too. Maybe those investors who stubbornly stick with "old" News Corp. can look forward to an eventual Berkshire Hathaway (BRKB) investment.
But make no mistake. The market has spoken. If News Corp. doesn't split, it would be a catastrophic mistake and shareholders would likely revolt. Rupert Murdoch has to realize that.