the audit

News Corp. ponders a split

Easing but not erasing the Murdoch discount
June 27, 2012

Shareholders have been carping for years that Rupert Murdoch should get rid of his newspapers and focus on the real moneymakers.

So word that he’s seriously considering that sent the company’s shares up sharply yesterday, rolling back some of the longstanding “Murdoch discount” that has caused News shares to trade far below their intrinsic value. The market thought Murdoch splitting his newspapers and publishers from his other businesses made them all $4 billion more valuable yesterday.

The Murdoch discount is essentially a conglomerate discount made worse by Murdoch’s control of the voting shares, which prevents a takeover and allows him to do just about anything he wants with the company. Investor sentiment over the last couple of decades has shifted against conglomerates, which smooth out earnings by putting dissimilar businesses under the same roof, but also make it more difficult for investors to put their money in the sectors they want. Meantime, News Corp.’s investors have tended to think Murdoch puts his interests before theirs. Now investors will be able to sell the newspapers if they want.

It’s worth noting that this is a financial move that will leave Murdoch’s political power intact. Rupert and family will continue to control both companies and he will continue to leverage the power of one for the benefit of the other. If Murdoch’s doing this now, after resisting pleas for years, it’s surely because he thinks this is the best way to preserve that power.

That’s not to minimize the significance of the financial implications. They’re real, especially for the company’s newspapers. After a split, Murdoch could no longer subsidize his money-losing news assets with profits from Fox News and BSkyB. That could mean trouble, at least in the medium term, for the New York Post and the Times of London, whose losses have historically run in the tens of millions of dollars.

Michael Wolff writes this in The Guardian:

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The print division made a small profit last year. With the closing of the News of the World, one of its big earners, and with the continued fall in newspaper circulation and advertising, those earnings may be expected to disappear almost immediately. That will leave the three big money losers particularly exposed: the New York Post, the London Times, and the Wall Street Journal. The losses among them might be as great as $250m.

Actually, we can tell how the publishing division’s profits have done since the demise of the News of the World by looking at News Corp.’s earnings reports, and they’re not in danger of disappearing almost immediately. Through the end of March, they were down 22 percent from the previous year, while revenue is down 4 percent since shutting the NotW.

And Wolff is wrong to call the Journal a “big money loser.” Dow Jones, the paper’s parent company, said just last week that it has seen “profits grow significantly” in the last two and a half years. Now, maybe that means they rose from a hundred bucks to two hundred bucks, but somebody in News Corp.’s publishing division was making money: It earned $634 million on $8.6 billion in revenue last year—a 7 percent operating margin.

But its total profit margins as a standalone company would be significantly less with corporate overhead, interest, and taxes. It’s hard to see how that makes for a very enticing public company.

You have to wonder why Rupert doesn’t take it private instead.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.