What a News Corp. Split Could Mean for the Stock and Top Executives (Analysis)
UPDATED: Analysts suggest the Murdoch family could end up taking the publishing business private and discuss the future of COO Chase Carey, deputy COO James Murdoch and Joel Klein.
The stock of Rupert Murdoch's News Corp. rose in early Tuesday trading after the conglomerate confirmed that it is considering a split into two companies that would separate its growing entertainment businesses from its much-maligned publishing assets.
The stock hit a new multiyear high as Murdoch warms to the idea of a spinoff of the publishing unit, which Wall Street has long pushed for amid a lack of love for the low-growth newspaper assets. The company's phone-hacking scandal has only added to the Street's negative views.
Analysts surveyed by The Hollywood Reporter on Tuesday gave a thumbs-up to the idea of a separation of News Corp.'s film and TV businesses from its U.S., U.K. and Australian newspapers, book-publishing unit HarperCollins and its education businesses.
News Corp.'s film and TV businesses, including the Fox movie studio, Fox broadcast network, Fox News Channel and FX cable networks and others, would become one entity. The company's newspapers, HarperCollins and education businesses would become another. The latter would have much smaller revenue and operating profit and include The Wall Street Journal, the Times of London and The Sun tabloid, part of News International in the U.K., which has been at the center of the phone-hacking opprobrium.
"It’s a corporate action that I’ve been advocating for more than a year now, even pre-hacking scandal, as investors don’t like the publishing assets," said Miller Tabak analyst David Joyce. "It should be a positive for News Corp. shares."
Echoed Wells Fargo analyst Marci Ryvicker: "We think that a potential spin makes sense and would be a significant positive catalyst for the stock." She reiterated her "outperform" rating on News Corp.'s stock.
"Historically, we believe News Corp. shares have been weighed down by a holding company discount as well as a Murdoch discount," said Barclays Capital analyst Anthony DiClemente. "We think that a split-up could reduce the holding company discount."
And Davenport & Co. analyst Michael Morris said that "a split would be viewed very favorably by investors" and that "there is currently little if any expectation in shares that a split could happen," meaning there is upside for the stock if a split becomes reality.
Larry Haverty of Gabelli & Co., a longtime institutional investor in News Corp., said that "moves such as this one have almost always been positive for shareholders."
He predicted that the entertainment business would clearly be seen as the crown jewel by most investors. "Clearly, the multiple for the electronic entity will rise reflecting the quality of the businesses," Haverty told THR.
Morris shared a similar view. "By removing the declining publishing assets, the cable networks business would represent 68 percent of total operating income for our fiscal year 2012 estimates," he said. "We see News Corp. cable assets as the most attractive in media and believe the market multiple on these assets would look more like Discovery's than News Corp.'s current multiple."
About the publishing assets, Haverty said: "The other businesses may not sell at a much lower multiple than the current entity based on valuation of similar public firms."
Joyce was less bullish about the outlook for the nonentertainment assets. Asked if a separate News Corp. publishing stock could positively surprise Wall Street just as CBS Corp.'s stock was seen as the older-media, low-growth business following its 2006 split from Viacom, only to become a hot commodity, he said no. "I don’t expect a positive performance [from the News Corp. publishing arm] as CBS is a world of difference -- it has content, retrans fees, Netflix monetization of content, etc.," Joyce said.
But how well a possible publishing stock performs "also depends on the distribution ratio of shares and the amount of net debt allocated to the publishing assets," Joyce said.
Lazard Capital Markets analyst Barton Crockett on Tuesday raised his price target on News Corp.'s stock by $2 to $26 based on his expectation that the split will occur. "We see a split as positive, separating secularly and legally challenged publishing from the much healthier TV networks," he said, attributing the publishing unit a value of only about $1 per current News Corp. share.
"Entertainment should get a multiple above peer averages," he said, though, highlighting the company's "fast-growing cable networks that rank among the industry's best performers domestically and internationally." He estimated the value of the entertainment unit at $25 per current News Corp. share.
Evercore Partners analyst Alan Gould estimated that the publishing entity could be worth about $5 billion. "That entity is of a size that it could potentially be acquired by the Murdoch family and/or private equity post spinoff," he suggested.
Morningstar Equity Research analyst Michael Corty said a split could also lead to dealmaking by the entertainment-centric company. "A split would make it easier for the entertainment business to eventually buy the 61 percent of [U.K. pay TV giant] BSkyB that it does not already own," he said. Last year, News Corp. pulled its offer for such a deal after the phone-hacking scandal.
In any case, most expect the Murdoch family would at least initially retain its voting stake of about 40 percent in both entities in the case of a spinoff.
S&P Capital IQ analyst Tuna Amobi called a publishing spinoff "a potentially significant value-unlocking move, with governance and Murdoch family control likely unchanged."
But observers had different views on how management roles at a split News Corp. could look. Currently, Murdoch is chairman and CEO at the conglomerate; Chase Carey is president, COO and deputy chairman; and son James Murdoch is deputy COO.
Haverty said it was "unclear how the management responsibilities will be parsed out" in case of a split.
"Rupert could still run both, at least as chairman," Joyce suggested. "Since the Wall Street Journal article says that education would be going with the publishing assets, perhaps it would be [education CEO] Joel Klein" who could run the broader publishing business as CEO. At least one person who formerly worked at News Corp. also suggested that Murdoch son Lachlan Murdoch could return to an executive position at the company and take over the publishing unit as CEO, with others mentioning the name of long-time News Corp. executive Tom Mockridge, who currently runs U.K. newspaper arm News International.
At the entertainment unit, Carey could become CEO sooner or later, with Rupert Murdoch possibly focusing on the bigger-picture chairman role. Some Wall Street observers have previously suggested such a rejig of titles at News Corp. in its current form.
Whether James Murdoch could be elevated in any such potential shift, to a role of COO, for example, wasn't clear, analysts said.
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