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$2.6 billion war chest sets News Corp on acquisition trail

Back in June, News Corporation announced that the company would be split into two, one being the print media business, which would carry on the name of News Corp (ASX: NWS), and the entertainment business division, which would be known as Twenty-First Century Fox (ASX: FOX).

With the split, US$2.6 billion in cash was left with News Corp to be partly used for acquisitions as it beefs up its print media assets. Currently, that includes such famous newspapers as The Wall Street Journal, New York Post and the UK’s The Times, as well as a long list of regional newspapers.

All of its Australian businesses, which comprise more than one-third of its annual turnover, will be held by the print media half of the split-up. Apart from such names as The Australian, The Telegraph, The Herald Sun and The Courier Mail newspapers already owned by Rupert Murdoch’s media empire, it will also include its half-ownership in Foxtel, the Fox Sports Australia cable network, and the REA Group (ASX: REA), which operates the realestate.com.au property search website.

For many years, the talk of the death of print media resounded, and many newspapers have fallen on tough times and much lower valuations. News Corp may not be able to reverse the trend, but if it can monetise the print service through increased digital subscriptions and more popular content, then it could still grow revenue.

It wants to add more video-related assets to expand online content, which would go hand in hand with its drive to get more readers to subscribe, and grow its sports and cable tv offerings. The CEO of Dow Jones, Lex Fenwick, plans to concentrate on selling data services and news to business customers, which can attract higher subscription rates.

As to which takeover targets are in the company’s sights, it’s staying mum on that, but Chief Executive Robert Thomson said, “I cannot be more specific but it would not be far removed from what we do now. We are not going into the fruit and vegetable business. We are not going to be fishmongers.”

Fairfax Media (ASX: FXJ) is also following suit by making its online news websites subscription-based after a tough 2012 during which it had falling profits and a shareholder control bout with Gina Rinehart attempting to gain board representation by increasing her stake in the company.

Foolish takeaway

Spin-offs are usually attractive to investors because when a company splits or demerges, it wants to make sure that the new entity is successful, so it adds a lot of extra cash for ongoing business, but also for growth by acquisition. That regularly means that investors buying the spin-off can get good value, a strong balance sheet, and good prospects for future earnings.

In this case, it’s the remnants of the former company that is being separated from the higher earning entertainment business. It can use those funds to pick up other print and video media companies that could be currently depressed in price, yet have greater long-term value.  Consumers are changing the way they read and get information, but they are still taking it in by ever increasing amounts.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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