News Corp’s plan to split its entertainment and publishing assets should help resolve the conglomerate discount which undermines its equity value. Over time, it will allow capital to be allocated more rationally across the businesses. We imagine growth-oriented investors will favour the much larger, higher margin entertainment business. The publishing entity is less attractive at face value, but could work with a big dividend payout ratio. Separately, this strategic move will increase the probability that News Corp (entertainment) can bid for BSkyB again, as print assets are kept at arms length. The time horizon is unclear and the UK regulator will not be taken in by this change of corporate structure per se, but it’s a step in the right direction. BSkyB shares may regain some bid speculation in the price. To be clear, there is no sense of any change in control. This is about industry focus and value creation. It should be applauded.
Alex de Groote is a media analyst at Panmure Gordon.
News Corp’s break-up is a necessary commercial move, isolating its entertainment arm from ongoing harm to its reputation from ongoing phone-hacking claims. But is it good for the public at large? Publishers are fighting to shift their business model from hard copy form to online content. Revenue in 2010/11 from News Corp's publishing arm was one third that of its TV and film counterpart; £5.6bn to £15bn respectively. The entertainment arm effectively subsidises the less profitable publishing division. A loss in resources for the publishing company will reduce standards and quality of journalism, not only within the News Corp group of papers but in the broader market. Long-standing and renowned titles are now at risk of being sold to other newspaper operators, some of whom would lower their quality. This would be bad news for the public, in an era where greater accountability and responsible journalism is required.
Chris Hutchings is media partner at Hamlins LLP.