Game change for an old fox

Rupert Murdoch has come up with a new moniker for his US cable entertainment business: 21st Century Fox. Free from the shackles of print and publishing assets, the investment community is expecting it will set off on an earnings romp.

But what of the demerged print, publishing and Australian cable business? With only months before it is set adrift there has been scrutiny of how it will look. We know Murdoch's lieutenant, Robert Thomson, will run the operation and Murdoch will retain chairmanship and majority shareholding.

It's also a fair bet US investors keen to hold the new 21st Century Fox will not be natural owners of the new News Corp.

It has been widely documented that demergers are usually beneficial for investors because the sum of the two listed entities is usually worth more than the original whole. Whether the News entities follow suit depends on two things: the re-rating of 21st Century Fox and the earnings performance of the demerged print operations.

One factor in the uplift in value of demerged companies is that one, or both, become prey to takeover offers. This possibility won't come into play given Murdoch will retain a controlling stake in both.

How the old-media News Corp assets fare depends on whether profits from growth businesses slotted into the company will compensate for declining earnings from print and publishing assets.

According to Macquarie Equities, they will. It forecasts the new News will come to market at about $10 billion, or $4.30 a share.

The US, British and Australian newspaper operations are in earnings decline. The Macquarie analysis suggests the News and Information Services segment that contains these assets, along with the newspaper inserts business, will see earnings before interest and tax decline 10.7 per cent a year over the next three years and will be a drag on capex.

The lion's share of this decline is attributed to the Australian operations, followed by the US, UK and then integrated marketing. Australian print earnings before interest, tax, depreciation and amortisation were $372 million in 2012 and Macquarie forecasts this will drop to $163 million by 2017. There is an assumption the US papers will also decline but will be more resilient.

Macquarie reckons these negative forces will be more than offset by positive earnings from the 50 per cent stake in pay TV operator Foxtel, the 100 per cent stake in Fox Sports, the 61.6 per cent interest in digital real estate operator REA Group and unwinding losses in the Amplify Education business.

Macquarie probably feels on firmer ground on its forecasts about the rate of improvement in Foxtel, Fox Sports and REA.

Foxtel forecasts are built on modest growth in revenue per customer and minimal subscriber growth but significant cost savings from the merger with Austar.

Investors need to judge whether News can keep a lid on the declines in earnings from print.

Earnings in the News and Information division fell by 23.5 per cent in 2012 and are expected to decline another 26 per cent in 2013.

Macquarie estimates the decline will slow to 10.3 per cent in 2014 and to 6.8 per cent the year after. If it is right, then the new News Corp has a reasonably bright future with a compound annual growth rate from 2014 to 2017 of 7.6 per cent.