The scandal of traders manipulating a key interest rate at Barclays
has cast a malevolent glow not just over the bank’s chief executive, Bob Diamond, but over its board. It was an open secret, at the height of the financial crisis, that something funny was going on with Libor, the London interbank offered rate, which Barclays this week admitted its traders had attempted to lower to make their employer’s health look better than it really was. But there is no evidence so far that Barclay’s board questioned what was going on, or pushed Mr Diamond to pursue the matter.
The complacency of banks’ boards, whilst enraging, is sadly nothing new. But one board which has been lambasted for its weakness finally appeared to flex its muscle this week. Long resisted by Rupert Murdoch, News Corp finally announced on Thursday that it would be splitting its entertainment and publishing operations into separate businesses.
The split makes obvious political sense. Separating the scandal-tainted UK newspapers – in investors’ minds at least – from the mainly US entertainment operations is long overdue.
The question of whether it makes financial sense is more complicated. The entertainment business, encompassing movies, television and cable, is vastly bigger and more profitable. The publishing business – which includes the Sun, the Times, the Wall Street Journal, the New York Post, Australian newspapers and HarperCollins – accounts for a quarter of total revenue but only a tenth of operating profit.
Without the publishing business, Goldman Sachs estimates News Corp’s operating profit would grow by 11 per cent next year, rather than 9 per cent. It values the entertainment business at just over $50bn, compared to News Corp’s market capitalisation of about $54bn. Given that the spin-off value of the publishing business could be over $6bn, the pay-off to investors in the short term is obvious.
Admittedly, initially at least, the newspapers would have to receive favourable treatment. The business would probably not assume any of News Corp’s debt and might be given a nice chunk of its $11bn of gross cash. It may need it – the final bill for the phone hacking scandal is unknown, but potentially very large.
The business’s long-term growth prospects are also cloudy. Mr Murdoch’s newspapers, like many others, are grappling with the challenge of making money in the digital world. And minority shareholders in the two new businesses will get no more say than they do in News Corp as currently constituted. The Murdoch family will have the same 40 per cent voting control in the spun-off publishing company as it has in News Corp.
This week’s developments, though, show that Mr Murdoch does not always get his way. And they suggest that one positive consequence of the phone hacking scandal could be that News Corp starts putting the interests of all its shareholders, not just a few, first. Maybe one day banks will follow suit.