Exelis Mission Systems Spinoff - Replay of Engility?

One ignored spinoff that I wrote up last May was Engility Holdings, a pure play government services provider that was cast off by L-3 Communications as a low profit margin, decreasing revenue business that was meant to highlight the parent company's higher margin businesses and earn a higher multiple in the market.  Despite Engility's debt, small size in relation to the parent, and several government budget showdowns, since the spinoff in July 2012 it is up well in excess of 100%.  Unfortunately, I never got around to investing in it at around $25 back in the spring, a missed opportunity that I'm still kicking myself over.

However, in December, Exelis (itself a spinoff from ITT Corporation) announced that it was spinning off its government services business in the summer of 2014.  In their recent investor presentation Exelis lists many of the same reasons for a spinoff as L-3 Communications did with Engility, basically the government services business is masking the overall growth and profitability of the core businesses.

Luckily for the future spin-off, thus far nameless, Exelis will be keeping the pension benefit liability, but the spin-off looks like it will be saddled with debt similarly to Engility post-spin.  The government services business should be able to support significant debt due to the predictable cash flows, low capex requirements, and variable cost structure (Engility made significant progress in refinancing and paying down debt in 2013).

There's limited information so far on the spin, but the Exelis Mission Systems business seems to be a near mirror image of the Engility/L-3 situation (even similar revenue and employee size).  The environment has changed a bit, the budget deficit has retreated from front page news, the overall market is way up, but I think you could see some selling pressure and a lack of coverage that could make the spinoff undervalued post-spin.  I'm keeping it on my watch list and will do a deeper dive once the filings come out.

Disclosure: No position

Year End 2013 Portfolio Review

One of my main goals of this blog is to keep myself accountable for my investing decisions because I am a loose believer in the Efficient Market Theory and think most people should invest in low-cost index funds.  All of my retirement accounts and a good chunk of my taxable account are invested in low-cost Vanguard funds (I'm sort of a Boglehead in that sense), but I do believe there are some opportunities for the smallish investor to exploit the market if you have the right temperament and the time/energy to devote to the process.

Strategy Overview
Below is a quick visual of the broad investment themes where I concentrate my time and believe where investors can generate above market returns, the more themes an particular investment hits the better.

I work in the banking/financial services industry, so my background knowledge and circle of competence skews towards investments in asset based businesses.  My goal over the long term (10+ years, multiple market cycles) is to generate an IRR of 20%, which will be difficult, but if I'm going to spend the time and effort, I want to make sure its worth my while over an index fund, otherwise I could be using this time on other income generating activities.

Year End Results and Current Portfolio

I started my active taxable account at the beginning of 2011 (but have been investing since 2004), below are my result from my first three years, a time period where I've admittedly had the wind at my back with only a few short and shallow corrections.  A couple clarifying points, my returns are an annual IRR for each particular year which produces slightly different results based on when I added cash to the portfolio (I haven't made any withdrawals), the 2013 returns are "pure" as I didn't make any additions to the account during the year.  The S&P 500 returns are not based on IRR, so its not quite an apples to apples comparison, and additionally one could argue the S&P 500 is not a proper benchmark given my lean towards small cap value stocks.

At this point, I'm pleased with my overall results, but also realize that I could be just lucky given the short time frame.

I also thought it might be beneficial to post my portfolio on a quarterly basis, so readers can relate and Monday Morning Quarterback my decisions, plus it will force me to only invest in high conviction ideas.  The below is my taxable brokerage account which follows the ideas that I post on this blog, as a full disclosure it's only a smallish portion of my net worth so the appearance of concentration or margin debt is not particularly significant for me, at this point its more of a hobby account.

As of 12/31/13

As I learn and gain experience, I will probably gradually transition some of my retirement accounts and other taxable accounts to a similar strategy, and at that point I'd probably also diversify further to 20-30 positions.  So take the above performance figures and holdings with a little grain of salt.

Year End Quick Thoughts on a few Portfolio Positions

Asta Funding

Asta is quickly turning into my lowest conviction holding and could be on the chopping block if I find a significantly better opportunity, I've started to lose faith in management.  On the latest conference call,  Robby Tennenbaum of Alta Fundamental summed it up perfectly with the following question (via Seeking Alpha)

This question is for Gary. So it looks like the personal injury business is growing nicely, and I'm sure there's good potential in the disability benefits business. But with your stock around $8.50 and a book value in excess of $13, and that's excluding the value of the zero basis portfolio, it's kind of hard to imagine how anything could have a better return on invested capital than buying back your stock. I mean, said differently, the market appears to be valuing all of your noncash assets at about $17 million. So I was hoping you could shed some light on how you think about the trade-off between maintaining the high cash balance for potential investments, especially in this challenging pricing environment, versus buying back your stock.

CEO Gary Stern then punts the question (which he has in the previous couple of conference calls as well) by talking about the private market transaction they did with an activist shareholder (PMCM) in June 2012 - they've also allowed their share repurchase program to expire last March.  First, management purchased shares back from PMCM at $9.40 a share, a premium to the then market price.  Why didn't management do a tender offer so that all shareholders could have benefited?  Probably because they wanted to reduce the activist stake and reduce the pressure on themselves.  Second, Robby Tennenbaum is exactly right, there's almost no investment that Asta could make that would be more accretive to shareholders than to buyback shares.  I just have a hard time selling at these prices, and when I invest in a deep value stock like this, I go in with an intended holding period of 3 years which should give management or the market enough time to realize a firm's intrinsic value.

American International Group

One of my larger positions has been in AIG, and it has contributed significantly to my portfolio's success this year.  I believe that large financials in the US are one of the few places to find significant value.  AIG still trades at a meaningful discount to book value, despite it's great turnaround in both operational metrics and capital allocation.  The company remains overcapitalized and will have significant opportunities to return cash to shareholders, hopefully in the form of share repurchases if its market price remains below book value.  Increasing interest rates should also benefit AIG as their low yield fixed income holdings roll over generating a higher ROE and EPS.

Early in 2014, I plan augmented my position (with fresh cash) in the AIG common stock with the TARP warrants that were issued in 2011 with a strike price of $45 and a maturity date of 1/19/2021.  I probably should have bought the warrants initially, but despite the run up in 2013, they still represent a great risk/reward profile and one of the few opportunities to earn a high IRR for 7+ years (also potentially valuable tax deferral).  The warrants come with a few anti-dilution adjustments to protect holders from dividend payments (above $0.16875 per quarter, the current dividend is $0.10 per quarter), stock dividends, rights offerings, and above market tender offers.  With the ILFC sale approaching a resolution, AIG remains one of my highest conviction holdings and should be setup for another good year in 2014.

2013 was a great year for the markets, I'm pleased to have out-performed over the broad market, and eked out a small gain over many diversified mid/small cap value funds.  Thank you for reading during the past 12 months and Happy New Year.

Howard Hughes Corporation: Ward Village

I'm here in Honolulu on vacation, so I took the short walk over to Ward Village to get a first hand account of one of Howard Hughes Corporation's primer strategic development assets.  Howard Hughes is planning to turn Ward Village into a vertical master planned community with 22 residential towers (4,000 units) and 1.5 million square feet of prime retail space.  Back in March, I put about a $2 billion value on the redevelopment asset (discounting it back to today), but given its long time horizon that's a very rough number that's subject to a lot of change.  What follows are just some random thoughts and pictures I took as I walked around the property today.

Below is the map of Ward Village, just south of the map is the Pacific Ocean, I can attest that any condo towers that are built in the area will have fantastic views of the ocean to the south, and great city views to the north.

For me, seeing the current state of Ward Village was a mixed bag, its a great location, but its current form is rather scattered and somewhat disappointing.  With it being 4 days until Christmas, I'm happy to report that all the parking lots were completely full with cars circling for spaces,  but most of the current Ward Village is Class C quality at best.  The below sign pretty much wraps up the current state of Ward Center and most of the entire property, quaint, but sort of stuck in time and clearly targeted at the lower-middle class shopper.

Ward Center

Ward Center feels like a small town indoor mall, not something you'd expect to see in downtown Honolulu.  The stores are mostly small local operations, one of the anchor tenants is Famous Footwear, and the hallways are tiny.  Again, it was fairly crowded, but likely due to the holiday season, I don't see why someone would go to Ward Center over Ala Moana mall just across the street.

Ward Warehouse

Ward Warehouse is pretty similar to Ward Center, but its an outdoor mall, but the same small town feel with local retail stores, but not really targeting the tourist market.  It seems odd to have both Ward Center and Ward Warehouse next to each other, they're different, but the same, definitely an opportunity to redevelop the area.  Neither are particularly valuable in their current form.

Ward Gateway Center

Across the street from Ward Warehouse is a pretty typical strip mall, nothing particularly interesting about it, looks dated, but still useful too.  I'd imagine this area is towards the back end of the redevelopment project, but there's a lot of unused space, it looks more like a strip mall in a suburb than something you'd expect to see in an urban center.

The IBM Building

The IBM Building, which is going to double as the sales office for Ward Village is the only sign of construction I see currently (and on a Saturday).  Slightly disappointed that it didn't appear the sales office was open yet as I was hoping to get a few brochures or more information.

On the plus side, The Ward Village Shops are nice and brand new with Nordstrom Rack and TJ Maxx as anchor tenants that distinguish the area from the Ala Moana mall next door.  The Ward Entertainment Center with the movie theater looks in reasonable shape as well, and will probably serve as a nice central point of the new planned community with only minor renovations needed.

Overall, I guess I didn't find anything groundbreaking walking around the property for an hour or two, but I did get a sense that the transformation isn't going to happen overnight, this is a long term asset that's going to take many years to fully play out.  22 towers will take a long time to build and sell without overwhelming the market, patience will be key.

I was fairly lucky and purchased Howard Hughes in the mid $30s when it dived in October 2011 (the last real market correction we had), so I'm sitting on a lot of gains.  Howard Hughes has a lot of great themes at play, its really a company that probably shouldn't be public, management doesn't issue guidance and the quarterly earnings results mean very little.  Also there's an owner/operator theme at work, David Weinreb bought in significantly when he took the CEO job, and Bill Ackman is the Chairman of the Board and has stated very publicly that he may never sell Howard Hughes and calls it one of the undiscovered gems.  While its hard to say that Howard Hughes Corporation is currently materially undervalued, I'm reasonably confident that the capital allocation decisions will be made with shareholder interests in mind, always important, but particularly so for a real estate development company with a long runway and many projects to choose between.  I'm planning on holding for the long term, let my gain hopefully compound, and defer the tax man.

Happy Holidays from Hawaii.

Disclosure: I own shares of HHC

Taking Some Profits in Gramercy

One benefit of writing down your investment thesis is it helps keep you rational, especially with your selling discipline, which I find much more difficult than buying.  Gramercy Property Trust (GPT) has been my largest and highest conviction position for almost two years and my investment thesis has mostly played out as anticipated.  I'm grateful to the Board of Directors for bringing in such a talented and transparent management team in Gordon Dugan and Benjamin Harris who breathed some much needed fresh air into a commercial mortgage REIT that was near death several times following the financial crisis.

While I believe in their business plan, the recent jump in the stock price is pricing in the future equity/asset growth over the current asset base, so today I decided to sell a little less than half my position at $5.31 to take some profits.

Running the same quick balance sheet valuation that I ran after the 2nd quarter results were announced, I actually come up with a lower per share value after the equity raise.  I think the issue is two fold, Gramercy has been purchasing assets at lower capitalization rates in the past quarter or two, and the equity raise was probably timed a little early (it would be great if they could do one at today's prices).

Going back towards a AFFO forecast valuation, I actually come up with an even lower amount than I did with the balance sheet method as MG&A is too high for the current asset base (nothing new here, management knows this).

+ $45MM in current & pipeline real estate NOI
+ $5.5MM in acquisition capacity real estate NOI
+ $3.5MM in asset management net contribution
- $12.8MM MG&A
- $12.2MM interest expense ($304 million @ 4%)
- $7.2MM preferred dividend
$21.80MM AFFO / 75.24MM shares = $0.29 AFFO/share

You can put your own multiple on AFFO, but at 15 times you get $4.35 per share.  Of course Gramercy won't look like this in 3-6 months as there will be another large equity raise and more acquisitions.  The operational leverage will start to take effect as management has previously mentioned that they could double the asset base while only increasing expenses by 10%.  That math (or buyout speculation) is the only explanation for the recent rise in the stock price that I could come up with, so I came to the conclusion that the prudent thing to do was to reduce my position from an outsized one to a more standard size core position for me (which is still concentrated).

I intend to hold my remaining position for the long-term as I'm reasonably confident in management's ability to add value through accretive asset purchases going forward and take advantage of the operational leverage by keeping the MG&A expenses relatively flat.  It's less of a Benjamin Graham stock now, more of an appealing growth story with significantly less margin of safety.

Disclosure: I own shares of GPT

ReHo Pulls the Sewko Holdings IPO

As a follow up to a previous post this summer, Retail Holdings ("ReHo") stated they were planning a sale of a portion of their equity interest in Singer Asia via a listing of a newly formed holding company Sewko Holdings (which in turn owns 100% of Singer Asia) in Singapore.  Unfortunately, the IPO date has been pushed back to sometime in 2014.  I'm not entirely sure what to make of this announcement as the markets, at least in the US, are at all time highs and it appears like a great time to come public.  I can only assume that they were unable to get a valuation close to the underlying value of the operating subsidiaries as that's been a target value in past annual reports.  ReHo has also done this before when they announced the sale of the Bangladesh subsidiary before terminating that agreement due to market conditions.  Is over promising and under delivering starting to become a pattern?

Checking in on the sum of the parts analysis of ReHo's valuation (cash has been reduced by the $1 per share dividend):

ReHo still seems very cheap at current levels, even if an IPO is a year off.  But why was the IPO delayed?

There was a Seeking Alpha article published a little over a month ago that did a good job of laying out the liquidation thesis, but a few commenters pointed out that an IPO might not close the valuation gap because Sewko would still be a holding company of publicly traded subsidiaries and still deserved a conglomerate discount.  I had the link to the preliminary prospectus, but its now dead, luckily I printed out the corporate structure and ownership as I was struggling with the question of whether Sewko deserves a discount.  The publicly traded subsidiaries are highlighted in yellow.  Hopefully its readable.

Sewko Prelim Prospectus

All of the operating subsidiaries other than Singer Thailand are controlled companies and majority owned.  Throughout the now dead draft prospectus, Sewko gave the impression that they control all of these subsidiaries and that they're essentially operated as one Singer.  I'd also argue that the market is relatively efficient and would price the operating subsidiaries at a discount in their home markets given the ownership structure and the minority shareholder position.  But it's still an issue that potentially prevents ReHo from realizing the full value out of a Sewko IPO.

I've also been corresponding with another ReHo shareholder that has concerns about the company's lack of operating cash flow for the past several years, which is certainly a bit concerning on the surface, but given the complexities of the consolidated accounting rules and different holding company structures I hope there's a good explanation?

Given the failed IPO, I think its wise to be a bit skeptical of the full NAV as a short term price target.  I'm open to any thoughts or comments from other holders on why the IPO might have been pulled, but these were a few thoughts I had today after hearing the bad news.  I'm still holding, but my conviction in the liquidation thesis has been taken down a notch, it might be time to take a closer look under the hood.

Disclosure: I own shares of RHDGF

Ultra Petroleum Diversifies Into Oil

On Monday, Ultra Petroleum announced the acquisition of an oil asset play in the Uinta Basin located in northeast Utah for $650 million.  The initial details and return figures of the acquisition sound great, almost too good to be true.  Ultra hasn't disclosed the buyer, but I'm sure that will come out as the details flow through SEC filings, but why would the other party sell at these levels of returns?  I'm admittedly an oil and gas industry novice, but the quoted returns at 60+% IRRs are great, right?

The acquisition also seems designed as a way for Ultra to ride out the low natural gas environment by focusing their efforts on this oil play that is cash flow positive in year one and has a paid back period of approximately five years.  Using 2014 production estimates, Ultra will now be a 90% natural gas and 10% oil, versus about a 97% and 3% split currently, which slightly impacts my natural gas macro thesis (and might cause some slight investor churn).  The oil acreage does come at a significant cost, Ultra is financing the entire $650 million through a combination of their credit facility and additional senior notes.  This will increase the debt load by 35% for an already leveraged company but given the quick payback nature of the acquisition, may still be a reasonable level, just limits their flexibility in the near term.

New Valuation: EV/EBITDA
2014E EBITDA = $915MM ($755MM previously disclosed estimate using $4 gas prices and $160MM from Uinta acquisition)
Net Debt = $2.49B (2014 $1.84B previous target, plus $650MM acquisition price)
Current Market Cap = $3.07B

EV/EBITDA =  6.07x

It still appears to me that Ultra Petroleum is an undervalued business, but I'm also beginning to fully understand my limitations as an investor and evaluating oil and gas exploration companies might not be in my circle of competence.  The market didn't like the acquisition, the price popped after the initial news but has declined well below the pre-news level since, but I'm going to be patient here and see if management can meet their lofty return goals.

Disclosure: I own shares of UPL

Buying "New" News Corp

(I actually like the logo)

Over the summer, the "Old News Corp" split up the business into two, the parent company was renamed 21st Century Fox and retained the entertainment and media assets, while the spinoff kept the News Corp name and was castoff with the less desirable publishing and newspaper assets.  Media mogul Rupert Murdoch remains the Chairman and CEO of 21st Century Fox, but also became the Executive Chairman of News Corp and, along with his family, controls 39.4% of the voting right Class B shares.  Even though he appears to have less influence over News Corp compared to 21st Century Fox, his reputation and heart is more on the line with the publishing and newspaper business.  At the May 28th investor day in New York (where the below slides come from) he started off the conference by saying "I have been given an extraordinary opportunity most people never get in their lifetime: the chance to do it all over again."  Rupert Murdoch inherited a paper located in Adelaide, Australia and turned into it the combined 21st Century Fox and News Corp in 60 years, an impressive record.

So there are lots of attractive investment themes at play here for the new News Corp: (1) a smaller unwanted spinoff that was designed to showcase the larger parent's more attractive growth businesses, (2) an owner/operator that is financially committed to the business, (3) an out of favor business with a clean balance sheet and attractive non-core assets that provide a margin of safety.

As I'll layout below, the new News Corp features several non-newspaper assets and a cash heavy balance sheet that when accounted for on a sum of the parts basis roughly equal the entire market capitalization of the company, so you get the newspaper businesses for "free" which generate over 70% of the company's revenues.  While the "for free" argument has significant flaws, when that business is the vast majority of News Corp it makes it a much more compelling thesis.

Cable Network Programming (Fox Sports Australia) & Foxtel
Australia is a rabid sports nation and News Corp owns its largest sports cable channel family in Fox Sports Australia, which is comparable to ESPN's dominance in the U.S. but on a smaller scale as Australia only has 23 million people.  The cable channel business is still an attractive one as content providers get the dual income stream of subscription fees and advertising revenue.

Additionally, News Corp along with Telstra Corp, Australia's largest phone company, each own 50% of Foxtel which was formed in 1995 and is an Australian pay television company operating cable, direct broadcast satellite television and IPTV services.  Foxtel is a dominate player in this space with over 2 million subscribers or roughly 30% of Australia's market.

In September 2012, News Corp purchased Consolidated Media Holdings in Australia for roughly $2B, doubling their stake in both Fox Sports (from 50% to 100%) and Foxtel (from 25% to 50%).

Extrapolating this valuation to News Corp's entire stake and you get roughly a $4B valuation for this segment.  It's interesting that this segment was included in the News Corp spinoff and didn't remain with 21st Century Fox with the rest of the TV and entertainment assets.  The company cites synergies with the publishing and media assets, but I would guess its more to provide an attractive asset or two (along with REA Group below) to carry the newspaper and publishing assets until there is a clearer path to monetizing the shift to digital.

Digital Real Estate Services (REA Group)
News Corp owns a 61.6% stake in the largest residential property website in Australia, REA Group (REA.AX), another non-core asset.  REA Group owns and operates Australia's largest residential property website, realestate.com.au, and Australia's largest commercial property site, realcommerical.com.au, which together have approximately 20.6 million desktop visits each month.  Many believe that Australia remains in the midst of a large real estate bubble, the topic has its own detailed Wikipedia entry even though it hasn't popped yet.  A down turn in Australian real estate values would presumably have a negative impact on REA Group's value as its been a pretty high flyer momentum stock, but its growth is nonetheless impressive.

REA Group is publicly traded on the ASX and has a market capitalization of A$5.38B implying News Corp's stake is worth $3.2B.  News Corp consolidates REA Group on its balance sheet, but doesn't have an intention of acquiring the remaining minority shareholders and is content to collect the dividend.  I'm a little skeptical on the synergies between REA Group and News Corp's other Australian assets and would welcome a sale of their stake given the overheated real estate market.

Book Publishing (HarperCollins)
News Corp operates HarperCollins the second largest English language publisher, which publishes over 200 best sellers every year.  In their stable are many of the popular fiction, children's and religious authors.

The book publishing industry is changing rapidly due to e-readers and tablets as more consumers download book content digitally.  Unlike the music industry where digital downloads essentially eliminated the album format and consumers chose to buy individual songs instead, consumers can't really do that with books, you don't buy only the 3rd chapter of a bestseller, you still buy the entire book.  This means the book publishing industry actually benefits from digital revenues as their margins increase as the production costs, return costs, and working capital needs (inventory) are much lower.  Below is a slide from News Corp's initial investor presentation showing the margin differential between hardcover books and digital copies, the difference between the two was surprising to me.

News Corp's book publishing business generated $142MM of EBITDA in fiscal 2013, putting a reasonable 7x multiplier implies a value of $1.0B for the unit.

Cash/Balance Sheet
21st Century Fox was generous to the new News Corp and left it with a strong balance sheet featuring approximately $2.5B in cash and no debt.  News does have an underfunded pension liability, but with interest rates likely to rise over the near to medium term, the liability should be less of an issue as interest/discount rates rise reducing the accounting value of the pension benefits.

Sum of the Parts w/o the News Divisions
So the main thesis, that purchasing shares today essentially gives you the newspaper assets for free, is laid out below.  The values below might be on the high side based on the control premium that News Corp had to pay for CMH and the potential bubble of real estate prices in Australia inflating the market price of REA Group, but I think it still clearly illustrates the remaining newspaper businesses within News Corp are being considerably undervalued.

So without any consideration for the News and Information Services business and the optionality of the Amplify digital education business, the other assets of News Corp values are greater than the current market capitalization ($9.72B) of the entire company.  So with that in mind, below are the assets the market is heavily discounting and could represent significant value if News Corp is able to drive revenue growth through digital platforms.

News and Information Services
The News and Information Services division of News Corp generated over $6.7B in revenue last fiscal year (~75% of the overall company), for $795MM of EBITDA, so despite the challenges facing the industry at large as people continue to move away from print to (mostly free) digital, this segment has tremendous value.  News Corp, and specifically The Wall Street Journal, as been on the forefront of the switch to digital and actually being able to charge for their content.  The real value driver for this business segment will be whether News Corp is able to take that model and apply its other papers in the UK and Australia.

Dow Jones & New York Post: Back in the pre-Great Recession days the old News Corp purchased Dow Jones for $5B in 2007, its probably worth substantially less now but its also worth noting that The Wall Street Journal has also grown its circulation by 8% CAGR during that time (graphic below), when most other newspapers have been struggling.  The Wall Street Journal is the number one daily newspaper in the U.S. by circulation, and has been proactive from the beginning in creating a valuable pay wall online where others have had difficulty making the transition.  WSJ is a strong brand with a focused demographic where many of its subscribers are not price sensitive (for instance, my work reimburses me for my subscription) giving News Corp ample room to raise prices in the future.  Dow Jones also has an institutional business, the model here is to create a Bloomberg like service where customers pay for real time business news, analysis and statistical data.

Additionally, News Corp owns the New York Post, the oldest daily newspaper in the country that's known for its outrageous headlines (particularly towards NY sports teams) and their Page Six celebrity section.  However, the New York Post is said to be a money losing operation, but also a Murdoch favorite so its likely to stick around.

News International (UK):  News Corp is #1 by print sales in the UK with 35% market share, it operates the #1 tabloid in the UK in The Sun, the #1 quality Sunday newspaper in The Sunday Times, and one of the top quality dailies in The Times.  The UK operations reputation was given a significant black eye after the phone hacking scandal at The News of the World in 2011.

Early in 2013, News International gave a glimpse at its strategy when it acquired the rights to online and mobile highlights of English Premier League matches for three years.  It will show them on the websites and mobile apps of its three remaining newspapers.  The Sun recently started charging for digital subscribers 2GBP per week for its content, it will be interesting to see how well this strategy works in the next few quarters.

News Corp Australia: News Corp owns a smattering of newspaper and magazines in Australia, including daily newspapers in each of the major cities (The Daily Telegraph - Sydney, Herald Sun - Melbourne, The Courier Mail - Brisbane, The Advertiser - Adelaide) and the only national newspaper in The Australian.  As of June 30, 2013, its daily, Sunday, weekly and bi-weekly newspapers accounted for more than 59% of the total circulation of newspapers in Australia.  The Australian newspaper assets probably have the furthest to go in the switch to digital, but at least management has a playbook to work off of and the desire to institute the pay wall model.

How much these business are worth is pretty hard to say given the rapid change going on in the industry, their declining revenues, but you don't have guess someone's weight to know they're fat, I believe the market is being unfair and valuing these businesses close to zero.

Core EV/EBITDA (ex-Foxtel, Fox Sports, REA Group)
Another way to look at the valuation would be to strip out the non-core publishing assets (Foxtel, Fox Sports Australia and REA Group) and look at the EV/EBITDA valuation the market is putting on the core newspapers and book publishing businesses.

Despite what News Corp says publicly, the Australian TV and RE assets seem rather non-core and appear to be included in the new News Corp in order to temporarily support the struggling publishing assets.  As a natural contrarian, I'm attracted to these publishing assets, but also appreciate the margin of safety provided by the non-core assets.

Capital Allocation, Previous News Corp Mistakes, and Amplify
Other miscellaneous stuff that should be mentioned when talking about the new News Corp: At the time of the spinoff, the new News Corp authorized a $500B share repurchase plan to support the stock in the event that holders would elect to sell their shares in the publishing business.  As of the 6/30 fiscal year end, News Corp has not repurchased any common stock.  News Corp will likely pursue some acquisitions although its unclear what form they will come in as they would likely face regulatory scrutiny over any newspaper purchases in their current markets.  There is some risk to having this much cash burning a hole in Murdoch & Co's pockets as evidence by the $5B price tag they paid for Dow Jones in 2007, and the even worse $580MM News Corp paid for MySpace before wrecking it and selling it for $35MM in 2011.

Amplify
News Corp is heavily investing in their educational start up that hopes to reshape the way K-12 is taught in America through digital content delivery.  In fiscal 2013, Amplify featured a $163 million EBIT loss.  This investment is a long term one, also one that operates in an industry with a lot of entrenched (union labor) interests that are averse to change.  While it is strange that the education sector has been exempt from technological change, much of the free cash flow of News Corp is going to Amplify, so an investment in News Corp rests somewhat on their ability to create a profitable and useful benefit (unlike most of the for-profit sector) in this segment.  Expect additional losses for the next 2-3 years, although management has indicated that starting with the 2014 school year, we should see some progress on Amplify's adoption level.

Conclusion
In totality, I'm willing to bet on Rupert Murdoch's attempt to recreate the magic in the new News Corp and rebuild his legacy after the UK phone hacking scandal.  The non-core assets that were included in the spinoff provide a nice margin of safety giving management a little time to monetize their undervalued and underutilized newspaper/digital content brands.  I would put the initial fair value at least 50% higher, and potentially more if the market warms to digital content assets like the ones in News Corps portfolio.

Disclosure: I own shares of NWSA (purchased today at a cost basis of $16.76).  NWSA are the non-voting class A shares, NWS are the voting class B shares, otherwise they are economically the same.