New News Corp's 21st century test

Initial trading in the demerging units of News Corporation was relatively uneventful today. Rupert Murdoch will no doubt be hoping for a similar outcome when they begin trading in the US tonight.

While the formal split of 'New News Corp' and the old, to be renamed 21st Century Fox, won’t occur until Friday week the securities began trading today as CHESS Depositary Interest on the ASX. While they fell from their opening price levels, the combined value of the two securities was ahead of the closing value of News Corp on Tuesday afternoon.

A better guide to how the market will treat the demerged entities will come overnight in the US. News has been concerned enough about the potential for a mass exodus of US investors from New News Corp that it has earmarked $US500 million of the $US2.6 billion of cash it has left in that entity for share buybacks to help ease their exit.

That exodus is likely to happen, if not overnight then over time. The US investors are primarily interested in News’ US film and television assets, which will be housed within 21st Century Fox.

New News Corp will own News’ vast newspaper and book publishing interests, as well as its half share of Foxtel, its Fox Sports business, its 62 per cent interest in REA Group and its fledgling digital education business, Amplify. The newspapers, of course, are confronted by the existential threat posed by the shift of audiences and content into digital environments.

If the combined value of the new arms of the old News Corp could hold up, Murdoch would be well pleased because the big bump in value as a result of the demerger – and it was a massive 65 per cent bump – has already occurred.

Before Murdoch announced the split, News Corp shares – depressed by the UK hacking scandal as well as the general question mark over the future of newspapers – were trading at or below $US20. Since that announcement last June they have traded as high as $US34.

With hindsight, until the demerger decision was made, the market was attributing minimal value, and perhaps even negative value, to the assets now held within New News Corp. The decision, by an initially reluctant Murdoch, unlocked enormous shareholder value. The demerger has been a success well before it has actually occurred.

There is an expectation that, free of the baggage of the newspapers, the 21st Century Fox entity will continue to be highly rated. The major residual question mark is over the sharemarket treatment of New News Corp.

Murdoch has given it a pile of cash and a debt-free balance sheet, as well as the valuable Foxtel and REA interests. Amplify is losing money but has considerable growth potential. It is the value of the portfolio of newspapers in the US, UK and Australia, many of them losing money, that is perplexing analysts and investors.

The pristine balance sheet of New News Corp will buy chief executive Robert Thomson and his senior executive team, which includes Kim Williams in Australia, time to try to transform the papers. There is already an enormous amount of cost-cutting occurring and a rolling out of digital subscription/paywall models across the group as part of the industry-wide search for a viable digital model.

There is no certainty of success but the condition of the balance sheet (News Corp has taken some major write-downs in the value of the mastheads ahead of the demerger) and the inclusion of Foxtel, REA and some other cash generating businesses in the new entity means that it has more capacity than most print media businesses to take and fund a longer-term view of the transformation strategies.

The separation will, however, make the performance of the assets within New News Corp far more transparent and bring far more external scrutiny and pressure to bear on Thomson and his team than has been the case while the businesses were virtual footnotes within results dominated by the performance of the US film and television businesses. That will create its own sense of urgency for the management.

Murdoch retains effective control of both entities and remains an executive chairman of both (and chief executive of 21st Century Fox) and while he could therefore take an holistic view of the market valuations of the two entities he – and New News Corp shareholders – stands to gain considerably if the demerger leads to a greater and tougher focus by management and the market on the New News Corp businesses than was the case when they were submerged within the old News Corp.

Business Spectator is owned by News Limited, a division of New News Corp.