News Corp. patron of big picture strategy

Moves jibe with long-term plan to update assets, add cash for buys

NEW YORK -- Rupert Murdoch's News Corp. has been in heightened deal mode again of late, announcing not only a $5 billion bid for Dow Jones & Co. but also a couple of potential asset sales.

While the news of planned divestitures seems to have baffled some of the more casual media and entertainment investors, longtime observers say the moves fit in with the conglomerate's long-followed strategy of continuing to update its asset portfolio to optimize its mix of high-growth businesses and more mature, dependable operations by selling noncore units and using the cash for acquisitions or investments in growth assets.

Although News Corp. has a big-enough cash war chest of more than $7 billion to pull off the Dow Jones deal, increased financial flexibility is something chairman and CEO Murdoch has long held in high regard and likely wants to retain at a time when investors have lauded his firm's aggressive stock-buyback activity, analysts say.

"They always update their lineup of businesses to be in sync with where the media sector is going," one Wall Street observer said. "They proved they were cutting-edge when they bought MySpace (before anyone in the industry jumped into social networking in a big way), and they seem to be in another phase of adjusting their portfolio. Plus, it never hurts to have a healthy balance sheet."

Similarly, before the latest wave of deal talk began, News Corp. president and chief operating officer Peter Chernin highlighted during his firm's most recent earnings call that management's "general strategy is to try and push aggressively for margin expansion in our established and more matured businesses" and "growing those businesses so rapidly that we can afford to invest in new opportunities, which will be the growth drivers three, four, five years down the road."

The Dow Jones bid might not be for a high-growth asset in an emerging market, but the prestige of the company's Wall Street Journal and the potential upside from growing the newspaper's worldwide online revenue are obviously enough of a draw for Murdoch. Street observers in recent weeks have become more optimistic that the media mogul can get more money out of the Dow Jones assets than the current owners and also use them to boost other businesses he owns, like the Fox business news channel set to launch in the fall.

The recent wave of News Corp. deal talk also has focused on a potential swap of MySpace for a 25% stake in Yahoo Inc., which led to some initial head-scratching. After all, the MySpace acquisition has worked so well for the company that other conglomerates have openly expressed jealousy.

However, Street observers argue, Murdoch might already be thinking another step ahead after he recently acknowledged that Facebook has become a formidable competitor in social networking. As such, a swap could be a smart way to use the increased value of MySpace to get a stake in a broader online operation, some say.

In a recent report, Citigroup analyst Jason Bazinet mentioned a "diversification out of social networking" as a key benefit of such a move, in addition to the "ability to own an economic stake in paid search."

While sources say that the Yahoo deal talk got a bit ahead of itself, Bazinet estimated that under the reported terms, such a transaction would add about $1.50 per share in upside to News Corp.'s stock.

The same could be true for the asset sales that the company is eyeing, observers believe.

Miller Tabak + Co. analyst David Joyce said one key idea behind News Corp.'s announcement this month that it will sell nine of its 35 TV stations is that the company could "redeploy capital into international markets" or possibly swap the stations for a host of other content or distribution assets.

The divestiture also should boost the profitability of the company's station group as "a greater proportion of remaining stations will be in more operationally efficient, higher-margin duopoly markets," Joyce said.

The possible sale of the News Outdoor Group, also announced this month, is another move designed to rejigger the company's portfolio by getting cash from a strong but noncore asset that can be used for acquisitions or investments.

Bazinet calls the outdoor unit "a hidden gem" that is part of News Corp.'s financial reporting segment of "other" assets, which is why "many investors are unaware the asset even exits." A sale could fetch $4 billion and add about $1 per share to the stock, he estimated.

Summed up one Street observer, "The various moves may surprise people, but they all make sense in that they could keep News Corp.'s (asset) portfolio current and help the stock price."
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