After stating its decision of spinning off the publishing unit, News Corp (NASDAQ:NWS) has announced that it will split its TV and film businesses as well, and operate them as separate business units.  The decision comes as the company rethinks its operational strategy and most efficient way of running the business following the scandal it faced last year. The publishing scandal depressed the company’s stock price more than what fundamentals suggested. Perhaps this has prompted the company’s management to separate fundamentally different businesses to insulate them from each other.
Difference Between TV & Movie Businesses
While News Corp’s TV business consists of its cable and broadcasting networks as well as Sky Italia, its movie business includes box office, DVD and licensing sales of movies produced and acquired by Fox Studios. While media networks (TV) business tends to remain more or less predictable, movie business is exactly opposite.
In its cable and broadcasting networks, News Corp enjoys stable subscription revenues driven by negotiated yearly increases in subscription fees and a stable or growing subscriber base. Although this business also includes ad revenues which fluctuate with general economic conditions, the fluctuation is not as unpredictable as the movie business. Movie revenues and profits highly depend upon the success of individual films.
Apart from relatively higher stability, the media networks (cable and broadcasting) business has much higher margins compared to movies. This holds true for all media giants including News Corp. News Corp’s cable networks and broadcasting EBITDA margins stood at around 38% and 17% in 2011 respectively; whereas, movies EBITDA margins stood at around 18% in the same year. This suggests that overall the TV business has significantly higher margins compared to movies.
We estimate that cable and broadcasting networks along with Sky Italia constitute close to 70% to the company’s value while filmed entertainment business (primarily movies) constitutes roughly 20%.
Our price estimate for News Corp stands at $26.50, implying a premium of between 5% to 10% to the market price.Notes:
- News Corp studio co-chair Rothman resigns as film, TV split, Reuters, Sept 15 2012 [↩]