News takes a page from PaperlinX
ELEVEN years ago the board of Amcor could not have foreseen the digital juggernaut that would ultimately all but destroy its paper business. So there was plenty of serendipity around its decision to demerge these operations. The Amcor paper splinter business ultimately became one of the ASX's most notorious shrinking businesses - PaperlinX.
Even for those far-sighted enough to work out the age of paper was in decline, there was little need to debate the process. Demergers have always been a palatable way for investors to agree to the break up a business. To sell assets can lead to debates around price or the future performance of the assets.
A demerger is value neutral. It involves giving the original shareholders shares in a new company. In theory the sum of the parts should be equivalent in value to the original company. But history has shown shareholders generally get an uplift in value when a company is split by demerger.
There are all too many parallels between Amcor and PaperlinX 10 years ago and News Corporation today.
Rupert Murdoch's international multimedia group now based in the US is jettisoning its print operations via a proposed demerger. The print operations are in structural decline - similarly struck by the digital revolution.
The difference with Rupert Murdoch, his board and management is that they can see the future clearly from today's vantage point. Newspapers all around the world are struggling to stay profitable and most are just fighting to survive.
A mixture of tradition, sentimentality and thirst for influence has convinced Murdoch to retain these assets to date - despite an appreciation of the inevitable challenges. Until now the profits from the healthy parts of the empire have given him the luxury of indulging the desire to stay in print.
As recently as 2007, Murdoch expanded his print empire acquiring the America's prestigious Wall Street Journal.
Like newspaper companies around the globe (including the owner of this paper, Fairfax) the News Corp printing business has been undertaking painful restructuring. There will undoubtedly be more to come.
Almost continuous bouts of restructuring are the hallmarks of businesses in decline. PaperlinX is a case in point. In the first few years post-demerger, PaperlinX went on an acquisition binge picking up Spicers Paper to give it a big merchant operation in Australia and some geographic spread in the USA and Asia. It then bought assets in Canada and across Europe.
Since 2008 it has been a tale of selling assets and closing businesses. Five European operations and one in South Africa are gone as the result of its most recent restructure.
Yesterday it also announced the resignation of its chief executive, Toby Marchant - who had been in the job for less than two years.
For PaperlinX, which a decade ago was worth more than $2 billion, there are plenty of issues remaining. With a market capitalisation of about $25 million today it needs to contend with hostile shareholders, angry hybrid note holders while trying to reverse several years of corporate losses.
Even the spectre of vultures from private equity taking an interest has recently evaporated. The asset sales will give it some dearly needed liquidity and some short-term reprieve from bankers but it still faces a very uncertain future - its woes being exacerbated by the strong Australian dollar.
Meanwhile over at News Corporation the company's stock price is still basking in the post-announcement glow that the print business anchor will soon be cut.
(The good news for the Australian operations is that the company's 25 per cent stake in the profitable Foxtel pay television operations will stay in the print group. News is proposing to buy an additional 25 per cent of Foxtel but its chances of success are unclear.)
Despite the uncertain earnings outlook for the print business the market is pricing in a sum of the parts valuation that will be greater than the original whole. How long this premium remains post-demerger will depend on how the print operations fare on their own.
There will be plenty of shareholders that take the opportunity to ditch their shares in the print company just as there will be investors that seek to buy into the cable television and movie business.
While there have been suggestions the print business will be left virtually debt-free, there will need to be some sorting out of where the newly approved tax losses will reside.
News Corp received welcome news from the Federal Court yesterday, which found in its favour against the Tax Office in a decision involving $2 billion of what the company claimed were tax losses to which it was entitled.
The ATO had disallowed the foreign exchange tax losses that stemmed from the loans taken out by the company as part of its restructuring more than 20 years ago. Although these were repaid 10 years ago the Tax Office contended that no currency loss was incurred.