News Corp. Chairman Rupert Murdoch's fondness for newspapers won't be enough for investors to overlook declining profit at the publishing company he plans to spin off.
Operating income at the company's publishing unit, which includes The Wall Street Journal, the New York Post and The Times of London, dropped 32% from fiscal 2008 to 2011, according to data compiled by Bloomberg. A shift to the web has cut industry advertising and circulation revenue, while News Corp.'s entertainment units, including Fox networks and the Twentieth Century Fox film studio, increased profit by 13%.
"It's pretty clear that the publishing assets are an ice cube," said Don Yacktman, president of Yacktman Asset Management, the fourth-largest holder of News Corp.'s Class A nonvoting shares with a 4.8% stake. "If you look at what's happened in classified advertising with the internet, the whole industry is hurting."
While the new company will start with cash reserves and no debt, analysts project revenue and profit declines. For the year that ends this month, revenue at the publishing unit will drop 7% to $8.2 billion, estimates Brett Harriss, an analyst with Gabelli & Co. Earnings before interest, taxes, depreciation and amortization will slide 18% to $1.13 billion, he says. The New York Post loses as much as $110 million annually, he estimates.
"Times of London loses money, and so does the New York Post," Ken Doctor, an analyst with Outsell, said in a telephone interview. "Even with cash reserves to start, they'll have to make cuts."
The publishing company is being spun out without debt because it doesn't generate enough profit to support interest payments, according to a person familiar with the planning discussions.
In an interview yesterday, Mr. Murdoch, 81, projected optimism for the publishing group, suggesting that news is a valuable commodity and mobile devices such as Apple's iPad and Amazon's Kindle Fire will create new revenue sources. While the company will cut jobs at its Australian newspapers, overall he's looking to invest in the business to make it grow.
"Our publishing business is more valuable than people give us credit for," Mr. Murdoch said by telephone. "There are great digital opportunities in publishing, and net-net, around the world, we'll be increasing our numbers and increasing our costs and hopefully increasing revenues as well."
Mr. Murdoch had long resisted splitting off the declining publishing business, said two people familiar with the matter. He told his lieutenants at News Corp. they hadn't proven to him that a standalone publishing company could survive on its own, pointing out the company had said the opposite for months. Other newspaper operations haven't fared well on their own. Shares of publisher A.H. Belo Corp. are off 75% and E.W. Scripps Co. has lost 0.7% since splitting from their TV siblings in 2008, according to data compiled by Bloomberg.
Discussions to spin off News Corp. publishing picked up in the last few months, according to the people. After three straight quarters that internally were viewed as evidence of strong operations, News Corp. shares continued to lag behind rivals. Chief Operating Officer Chase Carey, Chief Financial Officer David Devoe and others concluded investors would always discount the company due to the newspapers, said these people.
Mr. Carey and others also made the point in meetings that the company had grown so large that high-priority decisions were being delayed or slipping through the cracks, according to these people. A separate newspaper and publishing company could get more attention with a dedicated CEO, they said.
In recent months, Mr. Murdoch embraced the idea that there were investors for a standalone publishing company, such as Vanguard Group and Alden Global Capital, which own stock in Gannett, the largest U.S. publisher, and McClatchy.
Mr. Murdoch, who will lead the entertainment unit as chief executive officer and is searching for a CEO for the publishing group, also told colleagues he'd be happy not to answer any more questions from analysts or investors about why he was spending money on newspapers, these people said.
It was apparent in meetings that Mr. Murdoch wanted to be able to argue publicly the move wasn't a concession to critics, regulators or investors, said the people.
Dan Berger, a spokesman for News Corp., declined to comment on the company's internal discussions.
Mr. Murdoch said breaking up News Corp. had nothing to do with the phone-hacking scandal at the company's U.K. newspaper unit, which has threatened the company's holdings in satellite-TV company British Sky Broadcasting Group. Ofcom, a U.K. media regulator, is considering whether News Corp. should be allowed to keep its 39% stake in BSkyB.
"This was purely a business decision that the company would be better this way," Mr. Murdoch said on Bloomberg Television.
-- Bloomberg News --