News Corp Economic Value-Added Analysis of Businesses
Most of News Corp.'s businesses earn less than their cost of capital as measured by their Economic Value Added.
Based on their their performance over the last two years from its most recent SEC quarterly filing, one News Corp. business unit looks like a keeper to me:
Cable network programming -- with $5.9 billion in sales in the last nine months and $2.1 billion in operating income -- it generated positive EVA in the nine months ending March 2010 and March 2011. And that level of EVA more than doubled from $333 million to $673 million.
Filmed entertainment -- with $4.9 billion in last nine months sales and $717 million in operating income -- it generated positive EVA in in the nine months ending March 2010 of $343 million and slightly negative EVA ($15 million) in the same 2011 period. This business is far more volatile than cable network programming but it could generate positive EVA in the the future. So I would consider selling this one after the ones listed below.
And News Corp. ought to sell the rest. Here's why it should sell the following units (below I've included my reasons):
Digital and other -- with $834 billion in last nine months sales and negative $477 million in operating income -- it generated huge negative EVA in in the nine months ending March 2010 of ($1.1 billion) and ($1.3 billion) during the same 2011 period -- a big deterioration. This is a grab-bag of different operations each of which ought to be analyzed separately.
Publishing -- with $6.5 billion in last nine months sales and $594 million in operating income -- it generated negative EVA in the nine months ending March 2010 of ($776 million) and ($640 million) during the same 2011 period -- a slight improvement.
Satellite TV -- with $2.7 billion in last nine months sales and $87 million in operating income -- it generated negative EVA in in the nine months ending March 2010 of ($105 million) and ($153 million) during the same 2011 period -- a big decline. This one looks like it may be difficult to make EVA-positive but I am guessing that News Corp.'s recently scuttled effort to acquire the 60% of BSkyB it does not already own would have helped this business.
Television -- with $3.7 billion in last nine months sales and $448 million in operating income --it generated negative EVA in in the nine months ending March 2010 of ($404 million) and ($142 million) during the same 2011 period -- a huge improvement. This one could be ripe for restructuring -- for example, while FoxNews may be earning more than its cost of capital, can the same be said for Fox Business?
This analysis offers some guidance of where further research could be useful for the businesses that appear marginal on an EVA basis -- such as Satellite TV, Television, and Filmed Entertainment. For these businesses, I would take a look at future EVA projections and would also consider ways of cutting costs or otherwise restructuring them to see if they could be turned EVA-positive.
But two businesses appear poised for prompt divestiture -- digital and other and publishing. It is hard to put a value on the first one since it consists of so many different units. But the value of its publishing unit is easier to estimate.
Applying a newspaper industry average Price/Earnings ratio of 11.7 to the Publishing Group's estimated 2011 net income of $490 million (calculating by annualizing the Group's first nine months' 2011 estimated net income) yields a value of $5.7 billion.
If News Corp. shuttered or sold off its money-losing digital and other units -- that could boost its 2011 net income by $636 million to $1.5 billion.
And the resulting restructuring moves might convince investors to assign News Corp. a higher P/E.
Based on their their performance over the last two years from its most recent SEC quarterly filing, one News Corp. business unit looks like a keeper to me:
Cable network programming -- with $5.9 billion in sales in the last nine months and $2.1 billion in operating income -- it generated positive EVA in the nine months ending March 2010 and March 2011. And that level of EVA more than doubled from $333 million to $673 million.
Filmed entertainment -- with $4.9 billion in last nine months sales and $717 million in operating income -- it generated positive EVA in in the nine months ending March 2010 of $343 million and slightly negative EVA ($15 million) in the same 2011 period. This business is far more volatile than cable network programming but it could generate positive EVA in the the future. So I would consider selling this one after the ones listed below.
And News Corp. ought to sell the rest. Here's why it should sell the following units (below I've included my reasons):
Digital and other -- with $834 billion in last nine months sales and negative $477 million in operating income -- it generated huge negative EVA in in the nine months ending March 2010 of ($1.1 billion) and ($1.3 billion) during the same 2011 period -- a big deterioration. This is a grab-bag of different operations each of which ought to be analyzed separately.
Publishing -- with $6.5 billion in last nine months sales and $594 million in operating income -- it generated negative EVA in the nine months ending March 2010 of ($776 million) and ($640 million) during the same 2011 period -- a slight improvement.
Satellite TV -- with $2.7 billion in last nine months sales and $87 million in operating income -- it generated negative EVA in in the nine months ending March 2010 of ($105 million) and ($153 million) during the same 2011 period -- a big decline. This one looks like it may be difficult to make EVA-positive but I am guessing that News Corp.'s recently scuttled effort to acquire the 60% of BSkyB it does not already own would have helped this business.
Television -- with $3.7 billion in last nine months sales and $448 million in operating income --it generated negative EVA in in the nine months ending March 2010 of ($404 million) and ($142 million) during the same 2011 period -- a huge improvement. This one could be ripe for restructuring -- for example, while FoxNews may be earning more than its cost of capital, can the same be said for Fox Business?
This analysis offers some guidance of where further research could be useful for the businesses that appear marginal on an EVA basis -- such as Satellite TV, Television, and Filmed Entertainment. For these businesses, I would take a look at future EVA projections and would also consider ways of cutting costs or otherwise restructuring them to see if they could be turned EVA-positive.
But two businesses appear poised for prompt divestiture -- digital and other and publishing. It is hard to put a value on the first one since it consists of so many different units. But the value of its publishing unit is easier to estimate.
Applying a newspaper industry average Price/Earnings ratio of 11.7 to the Publishing Group's estimated 2011 net income of $490 million (calculating by annualizing the Group's first nine months' 2011 estimated net income) yields a value of $5.7 billion.
If News Corp. shuttered or sold off its money-losing digital and other units -- that could boost its 2011 net income by $636 million to $1.5 billion.
And the resulting restructuring moves might convince investors to assign News Corp. a higher P/E.
posted by petercohan at 6:17 AM
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