the NWS split
Monday evening the Wall Street Journal reported that News Corp (NWS) will be considering splitting the company in two at its next board meeting. The movie and television units would be placed in one publicly traded company, and the newspaper and publishing divisions in another. Presumably both new companies would retain the current dual share structure, which ensures effective control by the Murdoch family. Given that NWS owns the WSJ, the report should be considered highly reliable.
not a new idea
Dividing a conglomerate into smaller, more focused pieces isn’t a novel idea. But it’s one that has so far been opposed for NWS by family patriarch, Rupert Murdoch. Maybe he worries that doing so would dilute the extraordinary political influence NWS has been able to wield in the countries where it has operations.
The rationale for considering a separation now is doubtless the negative political and regulatory fallout from the cellphone-hacking scandal that has engulfed NWS’s newspapers in the UK. The affair has foiled the company’s plans to acquire complete ownership of BSkyB. It might also ultimately result in NWS being forced to divest its current controlling interest in the satellite broadcaster.
Demonstrating that its BSkyB equity is held in a corporation completely separate from the Murdoch newspaper operations may be a pivotal consideration in staving off this outcome. True, the regulators may regard the move as simply a ruse, especially if the successor companies have basically identical boards of directors. But NWS’ allies in the British government must either think the move has a reasonable chance of success, or that without it the negative outcome for NWS is a foregone conclusion.
the move makes stock market sense
Reorganizing a conglomerate into a number of smaller companies may not always make economic sense. This is especially true for a firm run in effect as a privately-held firm. There may be complex borrowing and tax planning arrangements that need to be unwound, for example. There may be jointly-owned computer control systems that need to be separated. And what happens, say, to any book deals with Harper Collins that personalities on Fox News may have?
But it almost always makes stock market sense, for several related reasons:
1. In the case of NWS, the publishing/newspaper arm makes very little of NWS’ operating profit. On the plus side, then, it’s almost inconsequential. But bitter experience has taught every portfolio manager that when such “inconsequential” businesses lapse into loss, they can punch a huge hole in the bottom of the boat. That’s one reason for the PE multiple discount at which virtually all conglomerates trade.
2. Professional equity portfolio managers like to build their own portfolios. I may decide I want to overweight the media industry, for instance. Within media, I want to overweight film and TV, and severely underweight newspapers. This is harder to do with NWS than with “pure” film and TV companies. Another reason for the conglomerate discount.
3. Professionally managed equity portfolios are increasingly “style”-oriented, displaying either growth or value attributes. This is partly a function of the psychological makeup and training of the managers, partly a marketing constraint forced on them by the pension consultants who recommend them to institutional customers. Film/TV is arguably a growth industry. Newspaper/publishing is clearly a value one. So some managers may want one part, some the other. But none want the entire bundle. Conglomerate discount again.
In theory, then, and almost always in practice, the sum of the values of the two post-split pieces will be noticeably higher than the two were together. That’s the reason the announcement has sparked a rally in the stock.
Often, it happens that operations in each of the pieces become sharper and capital allocation becomes more efficient when they are run by experts in their fields rather than generalists. It’s unclear whether these favorable developments will also occur, given that the Murdoch family will be fully in control of both sides. But they may. And this isn’t the main reason the stock is going up, in any event.
calculating fair value
How to get a fair value for the decoupled pieces? Compare each with its peers. I’m not a NWS fan (although I’ve watched the company grow from its Australian roots since the mid-1980s), so I’m not going to do the work. But it’s a pretty straightforward task, however. Value Line, which you can probably find in the local library, should give you all the relevant metrics.