What Rupert Murdoch's Split Is Hiding

Illustration: Brunoillo

In News Corp.'s division of entertainment and publishing, the "good" and "bad" news may not be so clear as it now seems.

After Rupert Murdoch's News Corp. announced June 28 that it will split its entertainment and publishing assets into two companies, some observers joked that they should be called "Good News" and "Bad News."

On the "good" side are the Fox film and television studios, satellite TV assets and cable networks such as FX -- key Hollywood moneymakers. BTIG analyst Richard Greenfield raised his price target for the combined News Corp. to $30 but said publishing would be worth only $1 per current News Corp. share.

On the other side, the publishing division, which includes such newspapers as The Wall Street Journal and New York Post plus book publishing, is seen as having a limited future, especially given the challenges for newspapers and the taint and costs associated with the News of the World hacking scandal. The split, which could happen this year pending regulatory approval, is "a solution to the … problem of News Corp.'s better media businesses funding the secularly challenged publishing business," says Cowen's Douglas Creutz. At press time, News Corp. stock was up 9.2 percent since rumors of the split leaked June 25.

But what if conventional wisdom is overstated? In a fast-changing media landscape, who says that the publishing company couldn't outperform expectations? At the same time, News Corp.'s Hollywood assets face real challenges, like those of all its peers.

'Good News' Isn't That Good

News Corp.'s high-flying entertainment brands certainly aren't invulnerable. The company has the top-rated U.S. broadcast network in Fox, but flagship series American Idol is aging -- and if ratings were to unexpectedly drop to NBC levels, the moneymaker could become a money-loser. The same is true for cable news leader Fox News and other TV assets.

In addition, the company is not immune to industry-wide volatility in the age of upstart disrupters like Barry Diller's digital TV broadcaster Aereo and Dish Network's ad-skipping Hopper service, both of which are under legal attack.

"If not enjoined, [Dish] will ultimately destroy the advertising-supported ecosystem," Fox has said about the Hopper, warning that not only will the device wipe out ad revenue, it will also interfere with the ability to reap revenue from Hulu, Amazon and iTunes.

On the film side, News Corp.'s 20th Century Fox has performed well enough in recent years, but last fiscal year's film earnings were down 31 percent to $927 million compared with an Avatar-fueled performance the year before. The company also faces the same challenges as the rest of Hollywood: exploding costs of making movies, increased competition and declining home entertainment revenue.

'Bad News' Isn't That Bad

At the same time, who's to say the publishing business won't surprise by being dependable? Murdoch has signaled that the new spun-off company will start out with zero debt and solid dividends at an attractive 3 percent yield.

The Wall Street Journal is one of the few papers that has made a paywall work. Murdoch has said that the phone-hacking scandal has cost the company "hundreds of millions of dollars," but observers see possible advantages from digital initiatives. "If things do change, its publishing business may be last around to take advantage given its financial resources," says Wunderlich Securities analyst Matthew Harrigan.

The new company also will take with it all of News Corp.'s Australian assets, including Consolidated Media, which the company wants to fully acquire in a move that would raise its stake in Aussie pay TV firm Foxtel to 50 percent and give it full control of Fox Sports Australia. "That is a really interesting asset," says RBC Capital Markets analyst David Bank.

Few expect the News Corp. split to play out like the 2006 division of Viacom and CBS Corp. That also was supposed to separate a high-growth film and cable networks company (Viacom) from a slow-growth, old-media business (CBS), and CBS Corp.'s stock gains have outperformed Viacom's since the split.

CBS under CEO Leslie Moonves has benefited from rich new revenue streams not contemplated in 2006, including retransmission-consent fees, digital distribution cash from Netflix and more. News Corp.'s publishing division doesn't have a clear path toward such upside, but Murdoch has said that even if newspapers go out of print, his titles will be around. "We're spending a lot of money trying to -- and succeeding in -- presenting every word of our newspapers on modern tablets," he has said.

Greenfield is pretty high on his estimation of the entertainment business' value compared with that of publishing, but even he recently admitted that the split was more about showmanship than a material effect on the businesses. "This is purely a move to appease Wall Street and better display the value of the parts," he told The New York Times.

For now, analysts have been glowing over the split plan. But as Murdoch, who once posed triumphantly on the cover of Wired magazine to tout his $580 million purchase of MySpace, knows well, in the entertainment and media industry these days, there's no such thing as guaranteed "good news."