The great News Corp breakup? And the Unmade Index kicks off today
News Corp shareholders will likely be better off if the company is broken up. But do Rupert and Lachlan Murdoch see it that way?
Welcome to the first edition of Unmade for 2022, mostly written in Horsham’s Pret A Manger, while you were sleeping.
Happy National Take Down The Christmas Tree Day. I knew there was something I’d been meaning to do.
Having steered clear of crowds in the run up to Christmas, cafe life now feels an acceptable risk - at least until it’s time to try to avoid the inconvenience of Covid infection ahead of my February flight back to Australia. I count myself lucky that rapid antigen tests arrive in the post when requested, and that I was able to get a third jab. There’s a lot to be said for the UK’s National Health Service.
I also seem to get more done in a noisy cafe than I do at my home desk. Perhaps it’s the turmeric latte.
Today, I’ll be introducing you to the Unmade Index, and reflecting on an intriguing piece of speculation about a breakup of News Corp which appears in this morning’s Australian Financial Review.
Introducing The Unmade Index
The first order of business is to introduce you to The Unmade Index, which launches today.
For a number of years, I’ve kicked around the idea of creating an index to track the daily performance of Australia’s ASX-listed media and marketing companies.
Much like the ASX 200, 300 or All Ordinaries come to that, there are any number of indexes locally and globally to track a particular sector.
The Unmade Index will keep an eye on locally listed media and marketing stocks.
Its main utility will be to tell at a glance how the sector has fared the previous day, along with those individual companies.
Creating the Unmade Index has been the work of Rosa-Lee Oster, who has been working behind the scenes as a researcher on Unmade. As I’ve written before, one of the benefits of being part of the Substack Pro program is their funding of freelance editorial support.
As to our methodology, first we identified the ASX-listed companies that deserved to be covered in the index. In order of market capitalisation, they are: Nine, Domain, Ooh Media, Seven West Media, HT&E, Southern Cross Austereo, Enero and Pureprofile.
There was no definitively right or wrong answer on whether to include News Corp, which is dual-listed on the ASX and NASDAQ in the USA. In the end, we chose not to - much of the company’s value comes from its US and UK activities, and its US$14bn market capitalisation would distort the rest of the index.
For the same reason, we chose not to include the News Corp-aligned REA Group. Again, much of its US$22.2bn market cap is because of its overseas interests.
If News Corp goes ahead with a float of Foxtel, that will be included in the index down the track. Similarly, I have my eye on influencer platform Tribe, which has been making noises about an ASX listing too.
Prime Media would have been included, if the year end takeover by Seven West Media had not taken place.
We have weighted the index by market capitalisation so a dramatic share price move by a smaller company will have less effect on the index price than that of one of the big players.
And we have tweaked our algorithm so that it weights Domain at 40 per cent of the other stocks. This is because Nine still owns 60 per cent, so the rest of Domain’s value is captured in Nine’s market capitalisation.
The index started life yesterday, coincidentally near the round number of a total market cap of $10bn.
The biggest single company, accounting for nearly 50% of the valuation of the index is Nine, with a market cap of $4.8bn. By contrast, research panel company Pureprofile, with a market cap of $66m, accounts for just 0.7% of the index.
The entire sector is tiny on the world stage, by the way. Yesterday, Apple rose above $3T valuation for the first time - that’s more than 300 times the capitalisation of the entire index.
On the first trading day of the year, which was yesterday, we began the day by assigning the index a reference value of 1,000 points.
As you’ll see from the graph above, it was not a good day for media and marketing stocks. With the exception of HT&E which did not move, every other stock fell. The index dropped by 2.9%, with the sector now worth $9.7bn. The Unmade Index now sits at 970.7.
Will Murdoch break up News Corp (again)?
One of the magic tricks of being stock exchange listed is finding value by breaking stuff up. Fairfax Media’s decision to float Domain in 2017 was what pushed the company’s share price up to the point where the merger with Nine was possible, for instance.
And (as we’ll be recounting in the next audio chapter of Media Unmade, uploaded tomorrow) Rupert Murdoch pulled off a similar trick in 2013 when he split the old News Corp into two, with one half containing the publishing and Foxtel assets, and the other becoming 21st Century Fox, containing most of the company’s studio assets. Most of that was then later on-sold to Disney for a blockbuster US$70bn.
Now, suggests, the AFR’s Chanticleer columnist Tony Boyd in an article filling the whole of today’s back page, Murdoch may be about to try to repeat the trick a second time.
Boyd - who appears to have taken the temperature of analysts who cover the stock - makes the case that sum of the parts for News Corp is worth far more than its current valuation.
Much of the $14bn market cap of News Corp is thanks to its 61% stake in the US$22bn REA Group. The stake in REA is easily the best deal Lachlan Murdoch ever did for the company.
Boyd argues that the company’s Dow Jones division, which includes the Wall Street Journal, alongside other digital data services, is another valuable, and growing asset. It’s only been a few quarters since the company split out the Dow Jones division into its own reporting line - presumably in an attempt to demonstrate its value and to offer a little more transparency.
And then of course comes the company’s two-thirds stake in the Foxtel Group, alongside Telstra. Boyd predicts that the anticipated ASX float of Foxtel will take place in the next three to five months, and could realise a valuation of between $4bn and $5bn.
He also points to the Harper Collins books division, which could be worth more than $4bn. That’s based on the price multiple Ten’s owner ViacomCBS achieved in 2020 when it agreed to sell its books division Simon & Schuster to Penguin Random House for $2bn.
Routes to a breakup could include private equity taking control of REA with News Corp making a full exit, suggests Boyd. Private equity could also get similarly involved in Dow Jones, he argues.
And what of the newspapers, including the Australian mastheads? Arguably, the News Media division is the least valuable part of the empire, even if the papers remain the closest to Rupert Murdoch’s heart, and perhaps the very last thing to go. In the UK, they include The Times, Sunday Times and The Sun. In Australia, the metro mastheads include The Telegraph, Herald Sun, Courier Mail along with The Australian.
The most recent data from News Corp covers the quarter from July to the end of September. While the News Media division pulled in revenues of half a billion dollars for the quarter - not dissimilar to the other divisions - its EBITDA profit, just $34m, was tiny compared to the other divisions. As Boyd drily observes: “For some reason, the Australian operations escaped the push for greater financial transparency.”
The division’s numbers should somewhat improve as the spoils of the News Media Bargaining Code negotiations with Google and Facebook flow, but it still lacks the growth story of digital real estate, financial data or subscription streaming. I wonder whether the papers could end up as a bargaining chip in a merger with other old media assets like Seven?
Throughout his career, Murdoch has made deal after deal, each magically creating a bigger business than it was before. He may have been a publishing genius, but he has also demonstrated even more deal-making acumen.
With the added backdrop of an Australian media in consolidation mode, the most surprising thing over the next couple of quarters would be if nothing happens.
Zac Martin to TBWA
Strategist Zac Martin has joined TBWA Melbourne as planning director. He was previously in the same role at Ogilvy, and before that was at Cummins & Partners.
Huawei losses corporate affairs chief
Controversial Chinese telco Huawei has lost its lead voice in the Australian market with long serving chief corporate affairs officer Jeremy Mitchell stepping down after 12 years with the company. Writing on LinkedIn, Mitchell said: “Unfortunately, Huawei has found itself in the middle of something much bigger than it and way outside its control. As Prime Minister's, Minister's, Heads of all the security agencies that I met with over those years, always acknowledged, Huawei is a good corporate citizen. It has never done anything wrong. This wasn't (isn't) about Huawei.”
Time to let you go about your Thursday.
As I mentioned, I’ll be sharing the next audio chapter of Media Unmade tomorrow, which tackles News Corp’s turbulent last decade.
As always, I welcome your thoughts to email@example.com.
And if you know a colleague who you think might benefit from subscribing to Unmade, please do forward this to them. Word of mouth is how we grow.
Have a great day.
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