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News Corp. Split Confirmed

Zacks Equity Research

It’s now official that News Corporation (NWSA), a 60-year old company with a market value of approximately $53 billion, will finally split into two separate publicly traded publishing and entertainment entities. The steering will remain in the hands of 81-year old veteran Rupert Murdoch, who views this as the right move, at the right time and in the right direction.

The diversified media conglomerate is spinning the newspapers, HarperCollins book publishing, its digital education operations and the integrated marketing services business. It is also and creating a much more profitable entity including Fox broadcasting, cable network, Fox News Channel, the 20th Century Fox movie studio, BSkyB, Sky Italia, Sky Deutschland, and pay-TV operations in Europe and India.

The decision to divide into two has finally brought a reason to cheer for disgruntled shareholders, who from a long time have been pressing hard to sever the publishing business.

The process of separation will likely take a year, and result in News Corporation’s stakeholders receiving one share in each new company formed for each share they currently hold. Murdoch’s family with approximately 40% voting right will spearhead both the companies.

Chase Carey will serve as chief operating officer of the entertainment company and maintain his present role in News Corporation. The company is yet to decide who will assume the role of CEO in the publishing company.

We believe that the breakup would help News Corporation to lift its image, which was tainted due to the phone hacking scandal that resulted in the closure of the publication of ‘The News of the World’ and abstinence from acquiring the remaining 61% stake in the British Sky Broadcasting Group.

Further, there has been immense pressure from shareholders to divest the publishing arm which has been grappling with lower operating profit compared with the entertainment unit. The secular headwinds and the migration of advertisers to the Internet due to increasing online readership have been hurting the publishing business.

This was quite evident from a 19% decline in operating income to $130 million during the last reported quarter on account of a fall in advertising revenue at the Australian and U.K. newspapers, partly offset by gains from Dow Jones, HarperCollins and the integrated marketing services business.

On the contrary, operating income jumped 15% to $846 million at Cable Network Programming. Advertising revenue climbed 10% on the back of growth registered across FOX News and the National Geographic Channels. Filmed Entertainment operating income rose 10% to $272 million.

It is obvious that the entertainment company with better prospects will enjoy greater chances of luring investors than the publishing entity, which in order to expand, would seek acquisitions and spread wings in the education industry.

In the past, there have been instances when companies split into two separate entities in order to unlock hidden value. CBS Corporation (CBS) was born out of Viacom Inc. (VIAB) when the latter split into two publicly traded companies Viacom and CBS Corporation on December 31, 2005. Based in New York, Time Warner Cable Inc. (TWC) formerly operated as a subsidiary of Time Warner Inc. (TWX). From March 12, 2009, Time Warner Cable started operating independently leaving Time Warner.

Currently, we have a long-term ‘Neutral’ recommendation on News Corporation. Moreover, the company holds a Zacks #3 Rank that translates into short-term ‘Hold’ rating.

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