What the New News Corp. Adds to Your Portfolio

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Major conglomerates typically split off underperforming businesses so they can receive a sharper focus from management and also allow the remaining operations to thrive without the added burden. 21st Century Fox's (NASDAQ: NWS) separation of its publishing operations, along with some other units, is no exception. Former News Corp shareholders holding the stock of the new News Corp. (NASDAQ: NWSA) may see benefits in the long run while the two initiate their respective strategies.

How it is composed - a publishing behemoth - in the U.S., Australia, and the U.K.

News Corp's News and Information segment will report on its financial publications, such as The Wall Street Journal and Barron's among others, along with the digital/online editions of these papers. These operations contribute about 80% of revenues. It also operates a Digital Real Estate, Book Publishing and Other division.

With advertising revenues from these products trending lower 10% year over year, and circulation/subscription revenues treading water, the publishing businesses required an overhaul. As a result, the company proposed last December to split or spin off the unit in order to realize "structuring efficiencies." Management touted the transaction as a means of continuing, and lending stability to, ongoing operations. We can surmise that the move was in lieu of an outright sale of the division. Accordingly, News Corp can maintain the same strategy, for the most part, that it had been pursuing prior to the split.

Its strategy going forward

Management states as its number one initiative for the new operation as investing in "high quality premium content." Chairman & CEO Rupert Murdoch has already pointed out that this is unlikely to include the buyout of further newspapers, part of the reason being because of cross-ownership and possibly "duopoly" regulations that restrict the ownership of multiple publications in one market.

It is more probable that News Corp will target digital properties like websites, mobile applications, video-on-demand services, and online video for instance. Along those lines, it plans to monetize its existing businesses by way of such platforms.

In my view, News Corp's best opportunity to lift the value of its publishing assets may well be to boost the subscription bases of its offerings, and this is accomplished through improvement of content as well as marketing. As an independent entity, News Corp may be better situated to invest in the content of products such as The Wall Street Journal, while growing its subscription base digitally and through enhanced customer service. In this way, it intends to replace lost advertising revenues with recurring subscription revenues, just as numerous companies have done in transitioning to the Internet.

Importantly, too, News Corp intends to distribute dividends to shareholders. Its elevated cash flows and debt-free balance sheet ought to allow its payout to be generous, though I believe the actual amount has yet to be declared.

CBS Corp. (NYSE: CBS) as a case in point

The closest comparison to the News Corp split was Viacom's 2006 spin off of CBS Corp. In that instance, the slower-growing broadcast television assets were separated from their parent, only to flourish in later years.

On its own, CBS could allocate resources to programming investments, as well as repurchasing shares and paying a sizable dividend. The network rose to the top of the ratings charts, behind programs such as CSI and NFL broadcasts, supporting viewership and advertising sales gains. It may well not have thrived as such under Viacom's wing.

On that note, I continue to recommend CBS shares for their long-term total-return value.

21st Century Fox a cable and film powerhouse

What remains of the former News Corp is more of a growth company in the same realm as Viacom, albeit more focused on adult audiences and sports networks. Its ownership of FOX News, the FX Network, Regional Sports Networks, the National Geographic Channels, SPEED, and the Big Ten Network should provide revenue and profit growth as cable viewership and distribution expands. Films are a bit more of an erratic sector in terms of income trends. Still, I like the prospects for the Film Entertainment business, behind a strong creative team and possible a sharpened focus on the film assets.

Conclusion

As two companies, the News Corp businesses might well provide investors with enhanced value. The publishing assets ought to gain greater attention from management, keeping them vital and improving their business models, while we look for growth from the existing cable and film operations at the new 21st Century Fox. 


Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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