How to Play the News Corp Spin-Off

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Over the past couple of months, some important new information has come to light about News Corp's (NASDAQ: NWSA) pending spin-off of its legacy publishing business. Collectively, the releases and statements provided by News Corp insiders and the company itself paint a clearer picture of the spin-off and give current and prospective shareholders a better sense of the deal's contours. Most importantly, it appears as if the deal remains on track for completion within the next several months.

News Corp's spin-off has been publicly discussed since the middle of 2012. In effect, the company will divorce its anemic publishing house and printed-news division from its more dynamic television and multimedia properties. In April, the company announced that the latter concern would be known as "21st Century Fox" after the completion of the spin-off. It also made clear that Rupert Murdoch would continue to serve as the chairman of each company.

News Corp and the competition

Investors who wish to understand how this deal could affect their portfolios should start by comparing News Corp to other big-name media companies. While neither firm has quite the heft or breadth of News Corp, CBS (NYSE: CBS) and The New York Times Company (NYSE: NYT) have components that resemble core parts of News Corp. For instance, CBS operates a robust broadcast arm that includes serial programming, special features, sporting events, and broadcast journalism. Meanwhile, The New York Times Company is a diversified old-line publishing firm with a growing multimedia arm and a diverse portfolio of journalism properties.

Financially, News Corp is quite a bit larger than these other companies. Its market capitalization of nearly $80 billion exceeds that of CBS by a factor of 2.5 and dwarfs Times' market cap of just $1.4 billion. In 2012, News Corp earned nearly $6 billion on revenue of over $35 billion. In comparison, CBS managed a take of $1.7 billion on $14.3 billion in revenue. The Times mustered earnings of about $154 million on revenue of nearly $2 billion. News Corp also has a formidable amount of cash: At $9.3 billion, its hoard far exceeds the respective CBS and Times' pots of $409 million and $955 million, respectively. This is especially worrying in light of CBS' debt load of more than $6 billion.

The spin-off's basic structure

The spun-off company will consist of a number of well-known publications that had previously existed under the News Corp umbrella. These include daily "rags" like The New York Post as well as somewhat higher-end newspapers like The Times of London and The Wall Street Journal. Importantly, the spin-off will begin its life with $2.6 billion in cash in the bank. Even better, it will have no significant long-term debt upon issuance. In contrast to the recent spate of debt-laden spin-offs that were clearly created in an effort to rid their ailing parent companies of profit-sucking liabilities, the "new" News Corp will represent an attractive investment prospect for print-friendly market-watchers.

Of course, the spin-off will still be operating in the hobbled publishing industry. News Corp noted that its print division took $2.6 billion in write-downs during 2012 and managed a net loss of just under $2 billion. Needless to say, this is not encouraging. However, Mr. Murdoch clearly believes that the company's cash hoard will enable it to make targeted acquisitions of ever-cheaper publications. Ultimately, he may be content with turning the new firm into the largest fish in an ever-shrinking pond. Assets like the HarperCollins book publishing house and an education start-up may help him achieve this goal.

Key differences between the two units

It is no secret that News Corp's publishing spin-off will contain the combined company's least desirable parts. In contrast, 21st Century Fox will feature a major broadcast news division, lucrative television and news studios, and a sports broadcasting arm that has inked lucrative contracts with the MLB and the NFL. Its Fox News division continues to beat out its cable-based competitors in the United States, and its sports contracts will not expire for some time. Combined with a rapidly expanding digital footprint, these assets should provide 21st Century Fox with impressive annual returns in the first few years of its existence. 

Also, it is important to remember that News Corp's publishing division continues to suffer from the lingering effects of the infamous U.K. phone-hacking scandal that destroyed the credibility of News Corp's News of the World publication, and ultimately resulted in the division's closure. Although it was not cited as a principal motivation for the spin-off, it seems clear that the scandal provided some impetus for News Corp to divorce itself from an already-anemic portion of its business.

How can investors profit?

According to a News Corp release, the Murdoch family will own about 40% of the "new" News Corp's shares. The company will have two share classes that will be differentiated by their voting rights. Given the size and expected liquidity of the new company, it is unlikely that investors will be able to profit from share-class discrepancies in the "new" News Corp. 

However, the company does have some interesting assets. Specifically, its business could represent an indirect play on the strength of the Australian real estate market. Meanwhile, its 50% stake in Foxtel's pay-per-view concern could allow investors to diversify away from print. In the event that these divisions outperform expectations, the new company's stock could experience a temporary uptick that might enable investors to earn quick profits.

In sum, the News Corp spin-off appears to be proceeding without much trouble. Although it is clear that the deal favors investors in the new 21st Century Fox broadcast and multimedia business, there may be opportunity for investors with exposure to the existing News Corp print business. However, the volatile nature of the entertainment and news industry demands that all investors perform their own due diligence before making an investment decision.

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