Murdoch puts publishing out on a limb

Now that News Corporation's board has unanimously approved the plan to split the media conglomerate in two, it would appear Rupert Murdoch has finally bowed to the pressure, internal and external, to distance the group's powerful entertainment businesses from their stuttering print siblings.

If he needed any convincing – the proposal would never have been on the News Corp board's agenda if Murdoch wasn't inclined to give it serious consideration – the market response as it became evident in recent days that a demerger of the publishing businesses was in prospect would have tipped him over the edge. News Corp's market capitalisation has leapt nearly $5 billion since the speculation of a split emerged.

That tends to reinforce the view that the combination of News Corp's film and television businesses with its newspaper and book publishing interests depressed the overall value of the group, with the publishing businesses being assigned negligible, if any, value. Indeed, given the potential liabilities associated with the hacking scandal in the UK, the market may well have regarded the newspapers as subtracting value from the group.

The process of separating the businesses into two entities is likely to be lengthy, complex and costly given that News Corp has been put together by Murdoch over 60 years after he inherited a single paper, The Adelaide News, in 1952.

In concept, however, a demerger is relatively straightforward. News Corp's film and television businesses, including its interests in pay television operators around the world, fit naturally together within a US-dominated grouping. They are also where the interests of News Corp's most senior executives, other than Murdoch, lie.

The "problem" for News Corp will lie in creating a sustainable publishing entity. With a number of its major mastheads losing money, the future of newspapers under a darkening cloud and no properly established model for adequately monetising audiences online, it won't be easy to convince the markets to assign meaningful value to that vehicle.

That may explain why there are suggestions News Corp will place its education division and potentially some of its investments in digital businesses within the publishing entity and, if the proposed $2 billion News Ltd bid for Consolidated Media proceeds and is successful, leave the Australian arm of the group as an integrated print and pay TV business.

Given that News Corp has a cash hoard of around $US10 billion and is generating free cash flow faster than it can spend it, it would have the capacity to give the publishing vehicle a very conservative balance sheet and the capacity to grow new earnings streams via acquisitions, presumably focused on digital businesses.

While the publishing businesses are routinely disparaged, and have been experiencing significant declines in earnings, Goldman Sachs analysts have estimated that News Corp's publishing activities could generate more than $US1 billion of earnings before interest, tax, depreciation and amortisation in the 2012-13 financial year, so they are not inconsequential other than within the broader News Corp, where they represent only about 10 per cent of group earnings.

Cast free of the protection provided by News Corp's bigger and far more profitable operations, the newspapers would – as is starting to occur in News Ltd here as part of a global News Corp print media cost-cutting drive – have no option but to focus on reducing their cost bases and accelerating their transition into the digital environment. A demerger would create real urgency and focus, and perhaps some casualties among the hundreds of mastheads News Corp owns.

Murdoch and his family, who control about 40 per cent of News Corp thanks to its dual share structure, would presumably retain control of the print media businesses that he loves. That's another reason why it is unlikely that those assets will be spun out of News Corp without a very robust balance sheet and some growth assets.

A demerger would distance News Corp's core US businesses from the latent risks and the distractions inherent in the continuing inquiries into the phone hacking scandal in the UK, although it is most improbable that it will be able to resume its attempt to acquire the outstanding interests in the UK's BSkyB pay television business any time soon.

While that might be a strand of the explanation for why News Corp's US executives have been so keen to spin the publishing businesses out, it probably isn't the major one. Those executives, and News Corp's bigger shareholders, have been keen to ditch the papers and concentrate on the film and television businesses for years but their pleadings fell on (Murdoch's) deaf ears.

Now, for a variety of reasons, amongst which may be his concerns that the fallout from the UK could reach and damage his US film and television interests, Murdoch appears to have finally accepted the logic of a separation and in the process created sufficient stock market value to make it near impossible to retreat to the status quo.

*On the 20th of June News Ltd announced it would acquire Australian Independent Business Media, which is the publisher of Business Spectator.