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News Corp. to insert Heritage

NEW YORK — News Corp. said Monday that it will spend $1.3 billion doubling its presence in the highly profitable direct-marketing biz with the acquisition of Heritage Media Corp.Heritage also owns six network TV affiliates and 24 radio stations, but News, whose TV station group is right at the audience limit, plans to sell the broadcast outlets and has already had talks with potential buyers. Analysts estimate that the broadcast sale will likely raise $600 million, reducing the net cost of the acquisition to $700 million.

Gloom on the Street

Nevertheless, coming at a time when News has committed billions of dollars to start sat-TV ventures around the world, the deal immediately sparked fresh criticism on Wall Street of News’ free-spending ways. News’ stock price fell 37¢ to $20.12 while Heritage’s stock price rocketed $5.87 to $18, $2.50 below News’ offer price of $20.50 a share.

While analysts praised the strategic sense of the acquisition, they questioned whether it would help News improve its prospects for earnings growth. “The market doesn’t want this company to make any more acquisitions, no mat-ter how good they are,” said Larry Haverty, an analyst with institutional investor State Street Research.

Profit center

Heritage Media operates marketing services businesses whose products include supermarket coupon ma-chines, so it complements News’ FSI magazine coupon inserts business. FSI is one of the lowest-profile companies owned by the global media conglomerate, but it is also one of the most profitable, generating an estimated $100 million in cash flow every year.

In a statement, News Corp. chairman Rupert Murdoch noted the complementary nature of Heritage’s business to FSI and added that “this merger continues the strengthening of our various marketing opportunities to the benefit of advertisers who use all types of vehicles to get their message across to consumers.”

While Heritage and FSI overlap little in their businesses, analysts said FSI was beginning to move into Heritage’s market area by, for instance, starting up some supermarket coupon machines. “Strategically (the deal) makes sense,” said Natwest Securities analyst Gary Farber, who added that FSI is a “cash feeder to (News’) other busi-nesses.”

More debt

Nevertheless, the deal is likely to upset Wall Street, because News is paying by issuing $754 million of pre-ferred stock and assuming $600 million in debt. News made the high-priced acquisition of broadcaster New World Communications Group last year using its preferred stock, angering holders of the stock, which now trades well below News’ common stock. The preferred stock fell 62¢ to $17.25 Monday.

News execs promised analysts at last month’s investor conference not to make more such deals that dilute the value of the preferred stock. Analysts said Monday it wasn’t clear whether the Heritage deal would improve News’ earn-ings or not.

Heritage’s direct marketing operations could double News’ coupon earnings to roughly $200 million, analysts esti-mate. Heritage now earns $70 million in cash flow from its direct marketing, but a News spokesman said there were “efficiencies” from putting together the marketing businesses, indicating that the company expects to improve cash flow.

But even assuming such an increase, Farber said the deal would not have a big impact on News’ earnings. “I don’t think it delivers anything that the market really wants: short term earnings growth.”

Earnings hit

News’ earnings in fiscal 1998 are expected to decline as the cost of the company’s investment ventures, such as its U.S. sat-TV deal and Fox News Channel, begin to flow through its profit-and-loss statement. State Street’s Haverty said Wall Street wants News to demonstrate that those investments are going to pay off rather than spending more money on other acquisitions. Still, Haverty could see the attractiveness of the deal to Murdoch.

“You can’t always run your business the way the market wants you to,” Haverty noted.

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