An Investment Opportunity in This Publishing Business Spinoff
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A historic day is coming for News Corp (NASDAQ: NWS) and its chairman and CEO Robert Murdoch. The company decided to split itself into two pieces: a newspaper business with the old name of News Corp, and an entertainment business with the new name of 21st Century Fox (NASDAQ: NWSA). I personally think that spinoffs and business separations are interesting as they present a really valuable source of investing opportunities. Of course, the attractiveness of a spinoff depends on the fundamentals of the core business and the price tag it carries as well. Let’s take a closer look to determine which is better for investors, the new News Corp or 21st Century Fox?
News Corp is cheap
The new News Corp, as a publishing business, will still own some prestige assets including the Wall Street Journal, London’s Sunday Times, the New York Post and book publisher HarperCollins. Moreover, it also possesses the sports programming and pay-TV distribution in Australia for Fox Sports. For the nine months ending in March, News Corp generated $6.83 billion in revenue and only $174 million pre-tax income. The net income attributable to the new News Corp came in at only $84 million, or $0.14 per share. The EBITDA (earnings before interest, taxes, depreciation and amortization) was much higher at $756 million. The much lower income compared to EBITDA was due to high levels of depreciation and amortization and impairment and restructuring charges.
What might make investors like the new News Corp is its strong debt-free balance sheet. As of March 2013, it had nearly $12.6 billion in equity, nearly $1.54 billion in cash, $2.85 billion in investments and no debt. It also recorded nearly $1.15 billion in deferred income taxes, which could be considered an interest-free loan from the government. At $15 per share, the new News Corp is worth around $8.6 billion on the market. The market values the new News Corp quite cheaply at only around 3.8 times its pro-forma 2012 EBITDA and 1.4 times its tangible book value (including nearly $6.5 billion in goodwill and intangible assets.)
The higher growth entertainment business
21st Century Fox will be a much higher-growth business, operating in several segments including cable and television, filmed entertainment and direct satellite broadcasting. In fiscal 2012, the company generated around $25 billion in revenue and nearly $3 billion in profit from continuing operations, or $1.20 per share. As of Dec. 2012, the company recorded more than $14.4 billion in equity, $5.25 billion in cash, $4.13 billion in investments and only $3.52 billion in debt. It's worth noting, however, that 21st Century Fox also had quite a large amount of goodwill and intangible assets at more than $16.6 billion. Consequently, the business had a negative tangible book value at nearly $(2.2) billion. 21st Century Fox is trading at around $29.20 per share, with a much larger market cap than News Corp of about $68.10 billion. In 2012, its EBITDA came in at around $5.38 billion. Consequently, the market values 21st Century Fox at a much higher valuation, at around 12.3 times its 2012 EBITDA.
Gannett expansion into broadcasting business
Gannett (NYSE: GCI), one of the biggest publishing companies, has a bit higher EBITDA multiple than the new News Corp. At $25.60 per share, Gannett is worth $5.86 billion on the market. The market values Gannett at 6.16 times its trailing EBITDA. The company derives most of its business operations from two main segments: the declining publishing business (70% of revenue) and the fas- growing broadcasting business (17%). Many investors have speculated that Gannett would generate a lot of value for its shareholders by separating the two businesses.
Gannett has recently expanded its footprint in its high-growth broadcasting business with the $2.2 billion acquisition of Belo. With this acquisition, Gannett will double its broadcast assets, making it the fourth largest owner of major network affiliates with 30% national coverage. Moreover, Gannett expects to realize around $175 million in annual run-rate synergies in around three years after the deal is closed.
At $2.2 billion, the pro-forma EBITDA multiple is only 5.4, including the three-year run-rate estimated synergies. Investors might also be excited with its plan to buy back around $300 million worth of shares in the next two years, representing more than 5.1% buy back yield at its current trading price.
My Foolish take
Personally, I think all three of these businesses could fit well in the long-term portfolios of media and publishing investors. I like the new News Corp with its quite low EBITDA multiple (after adjusting cash and investments), its strong debt-free balance sheet and the ownership of great brands including the Wall Street Journal, Dow Jones, HarperCollins and Fox Sports Australia. 21st Century Fox could also deliver a decent gain for long-term investors with its higher growth. Gannett, with the acquisition of Belo, could experience good business growth as well, driving up its share price in the near future.
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