Are Wapping cuts to pay for Murdoch's Wall Street Journal adventure?

If you want to know what’s happening at Wapping, steer clear of News Corp’s annual report. Packed wit hglossy stills from the film and TV operations that generate two-thirds of its revenues, it is produced for an American audience.

At best, US investors regard Rupert Murdoch’s continued dalliance with British newspapers as mildly eccentric. No doubt intentionally, Wapping’s financial performance receives only a cursory mention. Instead, Murdoch employees should head over to Companies House, where the accounts of Newscorp Investments are discreetly filed each year. These numbers disclose a lot more about what’s happening inside Murdoch’s UK empire.

On the face of it, the announcement of 100 job cuts at Wapping looked nasty. As several reports mentioned, the losses amounted to seven per cent of News International’s 1,400-strong editorial workforce.

Most bean-counters would regard this as fairly harsh medicine. But Les Hinton, who has run Murdoch’s British newspapers since 1995, probably sees things differently. As the accounts of Newscorp Investments make clear, The Sun, the News of the World, The Times and The Sunday Times employ around 3,878 people.

On this basis, last week’s cuts account for less than three per cent of the papers’ total workforce. At the heart of NI’s current difficulties lies a £600m plan to build new colour printing presses in Enfield, Knowsley and Glasgow. In an irony that won’t be lost on journalists who opposed Murdoch during the original Wapping dispute, the new presses are expected to make twothirds of the company’s production workers surplus to requirements.

Some of those jobs appear to have been scrapped already. In the year to June 2006, for example, Newscorp Investments recorded redundancy payments of £61.5m.

From this perspective, the 100 journalists destined to leave Wapping are simply sharing a bit of the pain required to re-tool Murdoch’s UK newspapers for the 21st century. But they’re also paying the price for what looks like uncharacteristically bad timing on News Corp’s part. Squeezing your operations for cash to finance major capital investments at the bottom of the business cycle is bad enough.

But as the accounts make clear, the decision to offload The Times Educational Supplement in October 2005 has also caused problems. In its last year as a Murdoch product, TES generated £23.6m of operating profit on turnover of £54.6m – precisely the performance you’d expect from a heavyweight cash cow.

The loss of TES has hit Newscorp Investments hard. Partly as a result, operating margins at the company’s newspapers collapsed to 9.5 per cent in the year to June 2006. That’s well below the respectable average of 15.5 per cent delivered by the same titles between 2002 and 2005. And it’s significantly less than the average for News Corp’s other newspaper properties around the world.

Beyond all of this turmoil, the broader strategic picture confronting Wapping’s newspaper bosses looks uncomfortably mixed. Papers account for a relatively small portion of News Corp’s total revenues. The logic of financial markets suggests that News Corp’s outside investors, who control nearly two-thirds of the company, will tolerate this sideline – but only so long as newspapers generate fatter margins than the rest of the business.

News Corp’s print titles have been punching above their weight for years. Unfortunately, this trend came to a halt during 2006, when papers contributed 16 per cent of revenues, but only 13 per cent of operating profits. Murdoch blames the business cycle for his newspapers’ recent poor performance. Here and in the US, interest rates are riding high and consumer spending remains sluggish. Since late-2005, advertisers have been tightening the purse strings with gusto.

On the horizon, however, a game-changing prospect looms – the possibility that News Corp investors might be asked to stump up a steep $5bn to acquire Dow Jones. Murdoch has plenty of ideas for expanding the Wall Street Journal’s revenue base. But in the short term, these plans will suck even more cash out of News Corp.

At the back of Hinton’s mind must be a concern that News Corp is planning to squeeze its British titles further – this time, to pay for Rupert’s proposed adventures in Manhattan.

If Murdoch does come a-calling for cash, it would help Hinton no end if the UK economy was firing on all cylinders. At Wapping, a return to fat margins can’t come soon enough.

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