Murdoch stokes cash

News Corp. takes 20% of pic-TV biz to Street

NEW YORK — Rupert Murdoch’s News Corp. will raise an estimated $2 billion to $3 billion in cash by spinning off its Fox film studio and television assets into a separately traded public company called Fox Group.

News Corp. will sell 20% of Fox Group to the public in an initial stock offering later this year, ensuring the conglom retains majority ownership and control of the Fox assets. Analysts estimate the new company will be worth about $15 billion.

Aside from raising cash for News Corp., creation of the company is expected to draw in many American investors who have previously shunned News Corp. as a complicated foreign company that mixes slow-growing newspapers with TV stations and money-losing satellite TV ventures.

“News Corp. believes that its decision to form the Fox Group and sell shares in a public offering will enable the investment community to better value the various entertainment assets and businesses which News Corp. owns,” the company said in a statement Monday.

The assets to be transferred into Fox Group are all the high-growth businesses highly regarded by Wall Street, such as the Fox Broadcasting Co. network, Fox TV station group, Fox’s interest in cable networks such as Fox Sports, FX, Fox Family Channel and Fox News, the L.A. Dodgers baseball team and the 20th Century Fox film studio.

Investors in orbit

Investors applauded the announcement Monday, sending News Corp. stock up $3.56 to $33.06, its highest point at least in the past year. The stock has risen 40% in the past three weeks, since News Corp. announced its intention to sell TV Guide for stock and cash to Tele-Communications Inc.-controlled United Video Satellite Group.

“I’m very happy. From a shareholder point of view, it’s the best thing Murdoch has ever done for the company in terms of bringing out the values,” said Robert Lyons, president of Chicago-based money manager Institutional Capital, which has a big position in News Corp. stock.

Once Fox Group is created, News Corp.’s directly owned assets will be composed of the slow-growing print media businesses like its Australian and U.K. newspapers and News Corp.’s investments in satellite TV ventures around the world such as Star Television in Asia, Sky Latin America in South America and BSkyB in Britain as well as United Video.

Fox flying

The Fox assets have been gradually growing as a proportion of News Corp.’s business. For the nine months to March 31, the TV and film assets contributed 50% of News Corp.’s operating income of $1.35 billion, up from 38% in fiscal 1994.

That proportion will grow in the next year: Fox has been getting big profit increases by overhauling newly acquired TV stations, and the film studio will have banner years in 1998 and 1999 as a result of “Titanic” (something which undoubtedly affected the timing of the offering).

News Corp. said it would use the money raised from the offering to repay debt, buy back stock and “for general corporate purposes,” which most analysts took to mean acquisitions.

Lehman Bros. analyst Larry Petrella predicted that News Corp., which already has about $3.5 billion in cash on its balance sheet, will use some of the money for a big acquisition, most likely in Europe where News Corp. is still not heavily represented.

Set to spend?

“Most of the money is probably already earmarked for spending,” joked one source close to the situation, alluding to Murdoch’s infamous propensity for deal-making.

Details of the new company’s financial structure won’t be available until News Corp. files a registration statement for the IPO with the Securities & Exchange Commission, which it said would occur within three months. The offering is expected to be completed by the end of the year.

Securities laws prevented News Corp. execs from elaborating on its statement, but sources close to the company said the valuation gap between News Corp. and other entertainment majors, like Viacom, Time Warner and Walt Disney Co., was a motivating factor in the IPO.

While the other three companies have usually traded between 11 and 14 times cash flow (earnings before interest, taxes, depreciation and amortization), News Corp. stock has tended to trade at around eight times.

The difference was due to several factors, most notably the mix of News Corp.’s assets between low-growth print media businesses like newspapers with higher-growth assets like TV stations and the heavy investment programs in sat TV ventures.

Easing into sat TV

“This alleviates the strain” imposed by the uncertainty of when the sat TV ventures would start making money, said Cowen & Co. analyst Gary Farber.

Many U.S. investors historically had avoided the company also because it was Australian-incorporated, which meant its stock could be traded on the New York Stock Exchange only through American Depository Receipts.

Accounting rules vary slightly in Australia as well, impeding comparison with the U.S. majors. Fox Group will be a U.S. company, so those differences will disappear.

Analysts estimate Fox Group will be worth $14 billion to $16 billion, with about two-thirds of the value attributable to the Fox network and TV station group. The U.S. broadcast television interests are expected to generate about $800 million in cash flow in fiscal 1999 (which starts Wednesday), Lehman’s Petrella estimates.

The studio is valued at about $5 billion, while News Corp.’s interest in Fox/Liberty makes up most of the rest, Petrella estimates.

The amount of cash to be raised from the IPO will be affected by how much debt is transferred from News Corp.’s balance sheet onto Fox Group’s.

News Corp. has about $8 billion in debt, most of it in 30- to 40-year bonds, but existing cash reserves reduce that to about $4 billion to $5 billion.

Petrella estimates that if News Corp. transfers half the net debt, Fox Group would raise about $2.5 billion in cash.

Cash rich

Analysts noted that Murdoch could use Fox Group stock as a currency to make acquisitions.

Sources said the idea for the IPO was devised among Murdoch, News Corp. CFO David Devoe and co-chief operating officer Chase Carey over the past few months. The strength of the stock market was one of the factors prompting News Corp. to move now.

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