A Deal on Rupert Murdoch


A Deal on Rupert Murdoch

News Corp.'s strategic positioning is not reflected in its share price.

Thanks to their company's acquisition by News Corp., Dow Jones shareholders went into the holiday season with some extra cash. But the acquisition wasn't exactly a lump of coal in the stockings of News Corp. investors either.

News Corp.'s chief executive, Rupert Murdoch, has big plans for Dow Jones. Although Dow has struggled to maintain profitability this decade -- its major property, the Wall Street Journal, saw ad revenues plunge with the implosion of the technology bubble starting in 2000 -- Murdoch wants to capitalize on the Journal brand. Analysts say he plans to broaden the newspaper's coverage so that it can compete better with the New York Times, and to leverage Dow Jones content across his other news platforms, such as Fox Business News and TV networks in India and Europe. Murdoch has also expressed interest in converting WSJ.com into a free site and has suggested that he might be able to slash costs by $50 million.

Of course, this is all a drop in the bucket for a media empire with annual revenues of $30 billion. News Corp. has eight main business segments: film, broadcast TV, cable network programming, direct broadcast satellite TV, newspapers, magazines, book publishing and its online businesses.

The biggest earner is the film segment, which generated $1.6 billion of the company's $7.1 billion in revenues for the quarter that ended September 30. Summer blockbusters such as "The Simpsons Movie" and "Live Free or Die Hard," which grossed $500 million and more than $300 million, respectively, carried the unit that quarter. Lehman Brothers analysts Vijay Jayant and Anthony DiClemente expect the film division to garner revenues of $6.6 billion in the 2008 fiscal year, which ends next June 30.


But the septuagenarian mogul's plans for News Corp. go far beyond mainstream films. In the company's 2007 annual report, he wrote that News Corp. has begun a transformation "from a traditional media giant into a digital juggernaut."

Central to that vision is the Fox Interactive Media (FIM) unit. In 2005, News Corp. acquired MySpace and folded it into FIM. MySpace has more than 110 million active users worldwide and is aggressively expanding abroad, with sister sites in 22 other countries so far. Standard & Poor's analyst Tuna Amobi expects the social networking site to generate $1 billion in revenues in fiscal 2008 and values the property at more than four times the $580 million News Corp. paid for it. "I don't think that value is anywhere close to being reflected in the stock price," he says.

And you can bet that Murdoch is putting the site to work. Currently, only 7% of dollars spent on Internet advertising goes to social networking sites, a figure that Murdoch expects will increase enormously. Last February, News Corp. completed its acquisition of Strategic Data Corp., whose proprietary technology will allow FIM to deliver highly targeted ads based on MySpace user-profile information. This is "the first time any website will have the technical ability to truly "hyper target" a brand message directly to a consumer," Murdoch wrote.

News Corp. has some potent cash cows in its cable television divisions as well. Amobi expects Sky Italia, a digital satellite service that reaches more than 4 million subscribers in Italy, to bump up its contribution from the 11% of revenues it generated in fiscal 2007. U.S. cable networks Fox News Channel and FX are currently renegotiating expiring affiliate fee contracts, and so far the units are securing "phenomenal" price increases, Amobi says.


The ongoing writers' strike could take a toll on earnings in 2008 as TV ratings slip. Granted, News Corp. should do better than most if the strike continues, thanks to the return of Fox's popular "American Idol," which doesn't rely much on writers. But some other networks, such as NBC, have had to reimburse advertisers for ratings shortcomings last fall.

Amobi rates News Corp.'s stock a buy and gives it a 12-month price target of $26. The stock (symbol NWS), closed on December 27 at $21.50, down 1.47% for the day. At that price, News Corp. trades for 18 times the $1.20 per share that analysts, on average, expect the company to earn in fiscal 2008.