'Avatar' blues: $500 million settlement wipes out the Navis

NEW YORK (Fortune) -- There's been a lot of positive buzz around News Corp. lately, a welcome respite after a year filled with disappointing results at most of its marquis businesses, from MySpace to newspapers and television.

Most of that buzz has come directly from the incredible success of Fox Filmed Entertainment's "Avatar," the 3-D film about a utopia inhabited by blue people with flat noses, which is poised to become the single largest-grossing film in history, with revenues approaching $2 billion.

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A settlement between News America Marketing and Valassis Communications has effectively wiped out parent company News Corp.'s profits from 'Avatar.'

Indeed, several analysts boosted their earnings estimates for News Corp.'s second quarter earnings, which will be released Tuesday. Alan Gould of Gould Research projects that the company will earn an amazing $300 million from the film.

There's only one problem: On Saturday, virtually all $300 million of that happy, shiny profit was destroyed as dramatically as the Navis' Home Tree in "Avatar." It came in the form of the latest of several court judgments and settlements relating to News America Marketing, the little-known, $1 billion unit of News Corp. (NWSA) that produces newspaper coupon inserts and in-store marketing campaigns.

For years, the company has been aggressively battling lawsuits from the likes of Floorgraphics, Theme Promotions, Valassis Communications (VCI) and Insignia Systems (ISIG), all competitors in one or both businesses that accused News America of unfair business practices.

But after settling with Floorgraphics and losing the first of three suits to Valassis last year, it appears the company has determined that it might make more sense to punt than to risk the consequences of fighting on. On January 30, just as the second Valassis trial was about to begin, News Corp. announced that it would settle all of Valassis' outstanding claims for a whopping $500 million (approximately $320 million after taxes).

Although the $500 million will be paid out as a one-time charge, and includes the $300 million award that Valassis won last July, the decision means that News Corp. is giving up its right to appeal. That's a dramatic shift in strategy for a company that aggressively countersued everyone and everything that accused it of wrongdoing, including driving one purported whistleblower, Robert Emmel, into bankruptcy.

It also suggests that more payouts may be in store relating to the next lawsuit on the docket, one by Insignia Systems that is scheduled to go to trial later this spring. For now, Insignia's CEO, Scott Drill, is talking tough: "We're five and a half years and $15 million into this case," he says, "and we're very optimistic. These people did a lot of bad things in the marketplace, and we're confident after all this that justice is going to prevail."

Some investors think a settlement in that case could cost at least another $50 million to $100 million. "Nothing has gone their way," says Anthony Marchese, president of Monarch Capital. Which means that News Corp. investors had better hope that James Cameron is ready to get "Avatar: The Sequel" going soon.