Saturday, January 31, 2009

Which way for News Corp in 2009?

There has been a lot of discussion about staff layoffs and alleged "dumbing down" of Fairfax newspapers in recent months, with a good deal of the discussion led by News Corp's national flagship newspaper The Australian.

This week sees the announcement of News Corporation's quarterly results for end-2008, and it could have considerable implications for News's Australian newspaper operations for 2009 and beyond. Note the view in this SMH article that investors increasingly view newspapers as a "legacy asset".

When the economy cratered last September, News Corp Chief Executive Rupert Murdoch quickly told investors his media empire would feel the pain.

After that, silence. With a week to go until quarterly results, investors wonder how bad things will be and are girding for sharper-than-expected profit declines, asset writedowns and perhaps more severe job cuts.

Punishing drops in the stock market, coupled with a slump in advertising spending, make it likely that News Corp will join peers such as Time Warner Inc and CBS Corp forced to revalue the assets on their books, analysts say.

So far, Murdoch has resisted big cuts for his 60,000-plus employees: News Corp has made limited cuts, including several hundred jobs at Fox Interactive Media, home of the MySpace social network. Media reports say more are on the way at The Wall Street Journal and New York Post newspapers, while Australian newspapers are also trimming staff numbers.

If Murdoch wants to keep the business healthy, it is time to make "hard decisions" and prune older media like papers, Pali Capital analyst Rich Greenfield said.

"We are concerned that the News Corp growth story, propelled by cable networks and Sky Italia, will be far less exciting over the next few years," Pali Capital analyst Rich Greenfield wrote in a note.

"It just feels like the legacy assets are weighing too heavily," Greenfield added in an interview. "I think they've been the most aggressive in trying to develop businesses with long-term returns on capital...where others initially didn't believe or thought the start-up costs were too high."

Journal cuts

One unit seen ripe for a writedown is Journal parent Dow Jones, which News Corp bought in 2007 for $US5.6 billion ($8.8 billion), or a 65% premium to its market value then. More recently, News Corp has been trying to cut costs at Dow Jones, including freezing employees' salaries this year.

US newspaper publishers have seen their shares lose half to nearly all their value in the past 12 months, prompting some to write down 20% or more of their assets.

Besides The Wall Street Journal, which has typically performed better than other newspapers, Dow Jones also counts local US papers, the Dow Jones Newswires, the Barron's financial weekly among its assets. News Corp also owns The Sun and Times of London and The Australian.

UBS analyst Michael Morris pointed to a $US25 billion writedown at Time Warner and a $US14 billion one at CBS. Assuming News Corp writes off a similar percentage, he estimated that it could write down $US10 billion, or about a sixth of its assets.

"In particular, we see possible issues at the broadcasting and publishing businesses, including Dow Jones," he said.

A writedown would not affect News Corp's daily performance, but it would be an admission the company paid more for acquisitions than it should have. That in turn could weigh on the stock price.

Bad news

News Corp's shares have fallen 67% in the past 12 months, underperforming peers such as Time Warner, Viacom Inc and Walt Disney Co.

Murdoch in recent months managed down shareholder expectations. In a statement in November, he said operating income would fall in the low to mid teens percentage points, instead of rising 4% to 6%.

He also warned that weaker overseas currencies, particularly the euro and pound, could hurt the New York-based News Corp. A little more than half its fiscal 2008 revenue came from North America and about a third came from Europe.

Many media companies have warned of more advertising sales declines. Magazine publisher and broadcaster Meredith Corp said automotive ad sale pacings are down 70% this quarter - a dire sign for companies such as News Corp.

Wachovia analyst John Janedis expects a 26% drop in operating income for fiscal 2009, which ends on June 30. Greenfield forecast a 30% drop, along with an 80% decline in TV profits.

Barclays analyst Anthony DiClemente forecast a 35% drop in revenue for News Corp's Fox TV stations in the second half of fiscal 2009.

In recent years, investors tolerated Murdoch's love of newspapers because his cable, satellite and interactive businesses were growing.

But MySpace competitor Facebook is grabbing more share of the Internet social media space. And Sky Italia's satellite business could suffer because of the weaker euro and a troubled Italian economy.

As if that were not enough, MySpace's $US900 million Internet search advertising deal with Google Inc expires in 2010, about the time economists expect the markets to recover.

"We do not believe a new Google search deal is likely to be as favorable," DiClemente said.

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