By Ryan Barnes. Edited By Douglas A. McIntyre
News Corp (NWS.A) – Price $24; Break-up Value $25
It was put best by Jon Ogg in the Entrenched Corporate Leaders profile just a few weeks ago: “News Corp is Rupert Murdoch, and he is News Corp”. The epitome of the media mogul, Murdoch built News Corp channel by channel and page by page. Properties and investments are constantly flowing in and out of the company in a seemingly shotgun approach to finding golden media assets. The stock has finally broken out of a longstanding trading range recently (no doubt helped by the retirement of John Malone’s 16% stake in the company in the DirecTV deal), but the valuation is still kept down a bit by the murkiness of the overall strategy and a few operating segments that are very old-line media, offering good cash flows but little revenue growth.
There are too many moving parts to break out each one individually, but there are some properties that have serious shareholder value that could be unlocked by examining their potential sale values, as well as assessing the value of the various equity stakes New Corp has. To start with, the Newspaper and Book Publishing segments are low-growth but steady cash cows that would allow for a little multiple expansion at News Corp. Based on industry-level multiples of 10x operating earnings, the two segments could sell for about $7.5b cash. The Magazines & Inserts segment (made up of mostly ad circulars) is a steady cash machine worth the same multiple, or about $3b.
The Television group could be spun off (again) as FOX, regaining its previous multiple of 13x operating earnings (and equivalent to newly spun-off CBS), giving that segment a value of just over $9.5b. The various equity stakes (including BskyB, GemStar, and NDS Group) have a combined value of about $10.5b, based on current market prices.
We’ll leave Mr. Murdoch something to hold on to in the form of a News Corp that controls the Filmed Entertainment and Cable Broadcast divisions, as the 2 groups can diversify cash flows and should be allowed to float to a multiple of 20-21x operating earnings, in line with peers. This slimmed-down NWS stock would have a market cap of $40b.
Now here’s where things get interesting. We’ve covered all the operating segments of the company except for the “Other” segment, which includes what some shareholders might have bought the stock for in the first place – the Fox Interactive Media Group, which is a collection of internet-based company assets that might easily be spun off in the near future, and including the MySpace.com website. Murdoch has spoke fondly of this one from the get-go, so you’d better believe he’s got a strategy for it. Investors loved the traffic numbers but wondered how it would be monetized. We also thought that about Google once.
Ironically, a deal with Google opened the door to just how valuable this set of properties will be to shareholders, with a guaranteed $900m in fees from Google to News Corp. already set in stone. Various analysts have pegged the value of the FIM group at anywhere from $3 to $15 billion, and with the recent prices paid for sites like YouTube as well as the stunning growth at GOOG itself, we feel pretty secure going on the high end of estimates as we wait for the revenue figures to build. Murdoch himself said just recently that he could sell MySpace for $6b “today”, which probably means he’s already received soft offers. The good news is that without counting this group, we’ve already arrived at a value of $22.50 per share, right about where the stock is trading now. So if you’re high on the prospects of the FIM group and MySpace and think it’s worth between $6 and $10 billion (like we do), the breakup value comes to $25 per share, and if not, the floor on the stock is still right there at current levels. Given the recent run-up in the stock (up nearly 50% in the past year), we think investors are betting on there being some serious value in the internet properties; as with all things, however, only time will tell.
Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.