NOTE 4. DISCONTINUED OPERATIONS
Separation of News Corp
On June 28, 2013, the Company completed the Separation of its business into two independent publicly traded companies by distributing to its stockholders all of the outstanding shares of News Corp. The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company's former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company's Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company's Class B common stock held on June 21, 2013. The Company's stockholders received cash in lieu of fractional shares. Following the Separation the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.
Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with ASC 205-20 and accordingly the Company has deconsolidated News Corp's balance sheet as of June 30, 2013, and presented its results for the three years in the period ended June 30, 2013 as discontinued operations on the statements of operations and cash flows. The Company has reflected the Separation as a distribution on the statement of equity as of June 30, 2013. The footnotes to the financial statements have also been revised accordingly.
Under the separation and distribution agreement, the Company agreed to provide a cash contribution to News Corp immediately prior to the Separation so that as of the Separation News Corp would have approximately $2.6 billion of cash on hand. Accordingly, immediately prior to the Separation the Company distributed approximately $2.4 billion to News Corp, which was comprised of $1.6 billion in cash funding and approximately $800 million that was held by News Corp's subsidiaries immediately prior to the Separation. The Company expects to make a final cash distribution of approximately $200 million, subject to adjustment pursuant to the separation and distribution agreement, within the next three months and has included this amount in Other current assets and a corresponding payable in Other current liabilities in the Company's consolidated balance sheet for the fiscal year ended June 30, 2013.
Separation and Distribution Agreement
The Company entered into a separation and distribution agreement with News Corp which sets forth, among other things, the parties' agreements regarding the principal transactions necessary to effect the Separation.
The separation and distribution agreement provides for the transfers of entities and their related assets and liabilities so that as of the Separation the Company and News Corp each consists of the entities associated with the businesses described above. The separation and distribution agreement also provides that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters (as defined below), as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp. U.K. Newspaper Matters refers to ongoing investigations by U.K. and U.S. regulators and governmental authorities relating to phone hacking, illegal data access and inappropriate payments to public officials at The News of the World and The Sun and related matters. In addition, the separation and distribution agreement governs the Company's and News Corp's agreements with regard to each party's ability to comply with certain statutes or rules and regulations promulgated by the Federal Communications Commission. (See Note 16 – Commitments and Contingencies)
Tax Sharing and Indemnification Agreement
The Company entered into a tax sharing and indemnification agreement with News Corp that governs the Company's and News Corp's respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Under the tax sharing and indemnification agreement, News Corp will generally indemnify the Company against taxes attributable to News Corp's assets or operations for all tax periods or portions thereof after the Separation. For taxable periods or portions thereof prior to the Separation, the Company will generally indemnify News Corp against U.S. consolidated and combined taxes attributable to such periods, and News Corp will indemnify the Company against News Corp's separately filed U.S. state and foreign taxes and foreign consolidated and combined taxes for such periods. The tax sharing and indemnification agreement also provides that the proceeds, if any, from the refunds of certain foreign taxes (plus interest) of a subsidiary of News Corp that were claimed prior to the Separation are to be paid to the Company, net of certain taxes. The Company has not recognized an asset since such amounts are currently being disputed by the foreign tax authority and the resolution is not determinable at this time. (See Note 18 – Income Taxes)
Employee Matters Agreement
The Company entered into an employee matters agreement that governs the Company's and News Corp's obligations with respect to employment, compensation, benefits and other related matters for employees of certain of News Corp's U.S.-based businesses (the “Employee Matters Agreement”). In general, the Employee Matters Agreement addresses matters relating to employees transferring to News Corp's U.S. businesses and former News Corp employees of those businesses that participated in the Company's retirement plans (including postretirement benefits) and welfare programs, which were retained by the Company following the distribution. The Employee Matters Agreement also addresses equity compensation matters relating to employees of both companies.
Summarized Financial Information
The following table presents the carrying value of assets and liabilities of News Corp, reflected in the Company's consolidated balance sheet as of June 30, 2012 (in millions):
| Total current assets | $ | 3,038 | |||
| Total non-current assets | 10,014 | ||||
| Total assets | $ | 13,052 | |||
| Total current liabilities | $ | 2,085 | |||
| Total non-current liabilities | 1,739 | ||||
| Total liabilities | $ | 3,824 | |||
Revenues and income from discontinued operations related to News Corp were as follows:
| For the years ended June 30, | |||||||||
| 2013 | 2012 | 2011 | |||||||
| (in millions) | |||||||||
| Revenues | $ | 8,891 | $ | 8,655 | $ | 9,173 | |||
| Income (loss) before income tax (expense) benefit | $ | 240 | $ | (2,251) | $ | 1,079 | |||
| Income tax benefit (expense) | $ | 365 | $ | 289 | $ | (356) | |||
| Income (loss) from discontinued operations, net of tax(a) | $ | 277 | $ | (1,997) | $ | 697 | |||
Cash flows from discontinued operations related to News Corp were as follows:
| For the years ended June 30, | ||||||
| 2013 | 2012 | 2011 | ||||
| Net cash provided by operating activities from discontinued operations | $ | 506 | $ | 956 | $ | 1,433 |
| Net cash used in investing activities from discontinued operations | (1,674) | (655) | (878) | |||
| Net cash used in financing activities from discontinued operations | (263) | (13) | (23) | |||
| Net (decrease) increase in cash and cash equivalents from discontinued operations | $ | (1,431) | $ | 288 | $ | 532 |
News Corp Transactions Prior to the Separation
Prior to the Separation, the Company's former businesses that are now subsidiaries of News Corp entered into the following transactions;
Fiscal 2013
Acquisitions
In July 2012, News Corp acquired Thomas Nelson, Inc., one of the leading Christian book publishers in the U.S., for approximately $200 million in cash.
In November 2012, News Corp acquired Consolidated Media Holdings Ltd. (“CMH”), a media investment company that operates in Australia, for approximately $2 billion in cash and assumed debt of approximately $235 million. CMH owned a 25% interest in Foxtel through its 50% interest in FOX SPORTS Australia. The acquisition doubled News Corp's stakes in FOX SPORTS Australia and Foxtel to 100% and 50%, respectively.
The carrying amount of the News Corp's previously held equity interest in FOX SPORTS Australia, through which News Corp held its indirect 25% interest in Foxtel, was revalued to fair value as of the acquisition date, resulting in a non-taxable gain of approximately $1.2 billion which was included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations for the fiscal year ended June 30, 2013. The fair value of News Corp's previously held equity interest of $1.6 billion was determined using an income approach (discounted cash flow analysis) adjusted to remove an assumed control premium. Significant unobservable inputs utilized in the income approach valuation method were discount rates ranging from 9.5% to 10.5%, based on weighted average cost of capital for FOX SPORTS Australia and Foxtel using the capital asset pricing model, and long-term growth rates of approximately 2.5%, reflecting News Corp's assessment of the long-term inflation rate for Australia.
In May 2012, Foxtel purchased Austar United Communications Ltd. to create a national subscription television service in Australia. At the time of this transaction News Corp owned a 25% interest in Foxtel. The transaction was funded by Foxtel bank debt and Foxtel's shareholders made pro-rata capital contributions in the form of subordinated shareholder notes based on their respective ownership interest. News Corp's share of the funding contribution was approximately $230 million. The subordinated shareholder note has a maximum term of 15 years, with interest payable on June 30th each year and at maturity. The subordinated shareholder note can be repaid in 10 years provided that Foxtel's senior debt has been repaid. Upon maturity, the principal advanced will be repayable.
Dispositions
In March 2013, News Corp sold its 44% equity interest in SKY Network Television Ltd. for approximately $675 million and recorded a gain of approximately $321 million which was included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations for the fiscal year ended June 30, 2013.
Fiscal 2012
In May 2012, News Corp sold its former U.K. newspaper division headquarters located in East London, which it relocated from in August 2010, for consideration of approximately £150 million (approximately $235 million), of which £50 million (approximately $78 million) has been received. The remaining £100 million (approximately $156 million) is in the form of a secured note and News Corp will receive £25 million (approximately $39 million) on May 31, 2014, and annually thereafter until May 31, 2017. News Corp recorded a loss of approximately $22 million, net of tax on this transaction, which was included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations for the fiscal year ended June 30, 2012.
Fiscal 2011
In fiscal 2011, News Corp acquired Wireless Generation, a digital education company, for cash. Total consideration was approximately $390 million, which included the equity purchase and the repayment of Wireless Generation's outstanding debt.
News Corp Impairments
During the fourth quarter of fiscal 2013, as part of News Corp's long-range planning process in preparation for the distribution, News Corp adjusted its future outlook and related strategy principally with respect to its News and Information Services business in Australia and secondarily with respect to its News and Information Services businesses in the U.S. which resulted in a reduction in expected future cash flows. As a result, News Corp determined that the fair value of these reporting units declined below their respective carrying values and recorded an impairment charge of approximately $1.4 billion ($1.1 billion, net of tax) in the fiscal year ended June 30, 2013. The charges primarily consisted of a write-down of News Corp's goodwill of $494 million, a write-down of intangible assets (primarily newspaper mastheads) of $862 million, and a write-down of fixed assets of $46 million. The impairment charges also include $42 million reflecting the potential sale of assets at values below their carrying values.
During the fourth quarter of fiscal 2012, News Corp recorded non-cash impairment charges of approximately $2.6 billion ($2.2 billion, net of tax) related to discontinued operations. The charges consisted of a write-down of News Corp's goodwill of approximately $1.3 billion and a write-down of the indefinite-lived intangible assets (primarily newspaper mastheads and distribution networks) of approximately $1.3 billion.
Other Discontinued Operations
In June 2011, the Company transferred the equity and related assets of Myspace to a digital media company in exchange for an equity interest in the acquirer. As a result of this transaction, the Company's interest in the acquirer, which is not material, was recorded at fair value and is now accounted for under the cost method of accounting. The loss on this transaction was approximately $254 million and was included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations for the fiscal year ended June 30, 2011. The assets, liabilities and cash flow attributable to the Myspace operations were not material to the Company in any of the periods presented and, accordingly, have not been presented separately. Revenues and losses attributable to Myspace for the fiscal year ended June 30, 2011 were $108 million and $228 million, respectively.