View from City Road: News makes for grim reading

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The Independent Online
AT FIRST sight it is easy to forget that News Corporation was near the brink of collapse little more than two years ago. It looks in amazingly good shape, especially given the depth of the recession in its three main markets - Australia, the US and the UK.

But beneath the cheery headlines lurks grimmer reading. At first sight Reed International's sale of its 3.66 per cent stake in BSkyB values the satellite television company at pounds 1.7bn. But Reed sold some debt along with its shares. Excluding this, the sale price values BSkyB at only pounds 1.22bn.

It may be that Reed had to sell at a discount because its consortium partners knew it wanted to sell. But it could equally be argued that they were prepared to pay a premium to remove an unhappy shareholder.

Either way, the pounds 1.2bn value is well below City estimates. James Capel had put a figure of pounds 2bn on BSkyB and Morgan Stanley had said it was worth as much as pounds 4bn.

Any hopes that News International would be able to increase substantially the value of BSkyB in its balance sheet have been dashed. Its June 1992 accounts included a value of pounds 362,000 - representing News' costs to date - for its 50 per cent stake. While the valuation from yesterday's stake might allow News to almost double that, it hardly seems worthwhile. For the record, News International said yesterday it has no plans to increase its balance-sheet valuation.

Despite News Corporation's financial rehabilitation - complete with a debt rating of BBB-minus - its accounts reveal continuing strain. Publishing rights, titles and television licences are still worth more than shareholders' funds. Put another way, without them there would be no equity. Borrowings still stand at about pounds 4.5bn or 75 per cent of reported shareholders' funds. And, despite equity and debt issues, the company still suffered a cash outflow in the half year.

There is, however, no quibbling with the near-doubling in operating profits. This is testament to News' tight control of costs and was helped by a turnaround at BSkyB.

Investors tempted to buy the shares because they offer exposure to recovery in the English-speaking world should look again at the continuing low tax charge. The parent company paid less than 10 per cent of operating profits in the half year and News International paid no tax at all. Any rise in the tax charge would quickly wipe out further increases in operating profits. Avoid the shares.

(Photograph omitted)