It has been a little over two months since Rupert Murdoch's media conglomerate, the 'old' News Corp, changed its name to Twenty-First Century Fox (NASDAQ:FOXA) and spun off its publishing division and Australian operation into a separate company called the 'new' News Corp (NASDAQ:NWSA).
With two separate companies, investors are now able to choose which investment they prefer. On one side you have Fox's exciting portfolio of film and television assets. On the other side you have the 'new' News Corp, with its portfolio of comparatively boring assets such as the Dow Jones and its most prominent asset, The Wall Street Journal. Unsurprisingly, many investors were salivating at the chance to own a piece of 21st Century Fox freed of its publishing businesses. I, on the other hand, saw three unique and compelling reasons to own a piece of this 'new' News Corp.
Pristine balance sheet
As with many corporate spinoffs, often the parent company will look to improve its own balance sheet at the expense of the soon-to-be newly independent company. It would have been a rather simple matter for Twenty-First Century Fox (the parent) to find creative ways to reassign some of its debt to the 'new' News Corp.
Strangely enough, the exact opposite happened. It was the 'new' News Corp that was given a balance sheet so clean that you could eat off of it. On its first day of trading, investors were able to purchase shares of a company with zero debt, $2.56 billion in cold hard cash, and $408 million in free cash flow generated in 2012. The good news did not stop there. In addition, Twenty-First Century Fox took the extra step of compensating the 'new' News Corp for any future civil claims, investigations and other legal expenses relating to the 2005-2007 UK phone hacking scandal.
With a clean balance, and free of any significant legal overhang, the board of this new independent company has already authorized a $500 million share buyback and announced their intention to pay a cash dividend. Not a bad way to start life as an independent company. Not a bad way at all.
Unrivaled Affluence & Audience Engagement
Excuse me for a moment while I throw a mountain of statistics at you. Of The Wall Street Journal's readership of over 3 million, 79% are college graduates, 77% are currently employed and 43% are millionaires. The average WSJ reader's net worth is $1.43 million, and collectively this very wealthy readership spends a total of $124 billion every year. Out of any U.S. publication, The Journal's readership ranks No. 1 in fashion, jewelry, and travel spending.
This highly desirable demographic is a gold mine for advertisers of high-end products and services: corporate banks, prestigious fashion houses, fine art dealers, private jet airlines, and luxury real estate companies. However, simply having an extremely affluent audience means little if that audience is not engaged in the product. Fortunately, that is not a problem for WSJ subscribers. The average length of a paid WSJ subscription is nine years, and the average reading time is 58 minutes and 69 minutes per weekday and weekend issue, respectively. That amount of time with eyes glued to the printed word is a large reason why an astonishingly high 68% of readers act on a piece of advertising they see in the Journal. An advertising gold mine indeed.
Undervalued & Underdeveloped Assets
One of the best reasons to break up a company is to allow management to focus more intently on the underdeveloped parts of the company that have such huge potential. Making up only 11% of the 'old' News Corp's operating income, the publishing division was definitely the middle child of the company, unnoticed and underappreciated.
Over at The Wall Street Journal, this new-found focus involves growing international revenues. Joining the China and Japan international sites launched years ago, WSJ introduced its German, Korean and Indonesian sites in 2012, and launched its Indian, Brazilian, Turkish and Spanish-speaking Latin American sites earlier this year. The Wall Street Journal is also busy building a platform of new products, including WSJ Portfolio and WSJ Profile (a LinkedIn-esque professional networking service).
Over at the rest of the Dow Jones, the phrase on the minds of executives is "institutional market." A $40 billion opportunity for the company, Dow Jones looks to grow its less than 1% market share in the category with its new "DJX" product. This provides companies, governments, banks, private equity and venture capital with real-time data, research, analysis, messaging and technology all in one single service.
Foolish Bottom Line
The breakup of the 'old' News Corp provides an intriguing opportunity for investors in the 'new' News Corp. Management of this smaller company is now free to give its undivided attention to assets that went overlooked in the past. With its influential properties like the Wall Street Journal (one of the few newspapers to actually grow its circulation in the digital age), the unrealized and immense institutional market potential of the Dow Jones, and a balance sheet and cash generator that many would envy, Murdoch's newest media endeavor is certainly not a company I would ever want to bet against.