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Should Fox Corp., which owns the likes of Fox News, the Fox broadcast network and Fox Sports, recombine with News Corp, home to The Wall Street Journal, New York Post, The Times, The Sun, Dow Jones, book publisher HarperCollins, Realtor.com and a 65 percent stake in Australian pay-TV firm Foxtel?
Media mogul Rupert Murdoch, 91, has suggested such a recombination of his media empire, with both companies unveiling on Oct. 14 that they have formed special committees to explore a transaction.
The Murdoch businesses were all under the News Corp. banner until the company split in 2013, in line with a broader industry trend, to form 21st Century Fox, mostly made up of the faster-growing film and TV portfolio, and News Corp, housing publishing and other assets. The entertainment company in 2019 sold a big part of its business to the Walt Disney Co. in a $71 billion deal and rebranded as Fox Corp. with a focus on news and sports, with Murdoch saying at the time that he wasn’t eyeing a merger with News Corp.
What has changed since then? And why re-merge now? Questions, along with alternative deal suggestions, were also a key part of Wall Street analysts’ reactions. “The announcement is surprising since News Corp was separated from Fox in 2013 to eliminate the conglomerate discount and enable both entities to trade close to their intrinsic valuations,” wrote Barclays analysts Kannan Venkateshwar and David Joyce. “Since then of course both companies have changed quite a bit, but what hasn’t changed is the fact that both News Corp and Fox continue to trade a significant discounts to their respective peers. Therefore, a recombination in itself is unlikely to solve this valuation problem for either company.”
The Barclays experts don’t see significant cost savings either. “Strategically, there is also very little business overlap between the two companies to rationalise the announcement on synergies,” they wrote. “There is no obvious immediate synergies, outside of some corporate expense savings, that are likely to be available.” Warned the duo: “this announcement is likely to further harden investor perceptions about assigning valuation discounts to Murdoch entities.”
Meanwhile, Wells Fargo analyst Steven Cahall also looked at other deals, calling the recombination of Fox and News Corp “not an overly obvious transaction.” In his report though, he did note: “However, since (the Disney deal) the media and news ecosystem has arguably gotten more challenging on the linear side. Fox News is around 65 percent of Fox’s earnings before interest, taxes, depreciation and amortisation (EBITDA) on our fiscal year 2023 estimate of $2.2 billion, and we can see how combining Fox News with the news assets at News Corp could deliver content creation and distribution synergies.”
Last year, the analyst had pushed for a News Corp deal, but not in the way Murdoch seems to envision it. Cahall argued that Fox “should spin Fox News into News Corp while looking at ways to combine broadcast/cable sports nets/stations with sports betting.” In that context, he noted on Monday that Fox owns shares in bookmaking holding company Flutter Entertainment, is a partner in Fox Bet Super 6 and has an option for a major minority stake in FanDuel. Cahall added, “We think news is a high-margin business, and as such a Fox News+News Corp entity could handle most of the combined debt load. By contrast, sports is levered by nature due to rights cost growth.”
(One potential catalyst is that News Corp activist shareholder Irenic Capital Management is pushing a plan, its co-founder Adam Katz told The New York Times, of separating the company’s growing online real estate business — like Realtor.com and holdings in Australian real estate sites — from its publishing division.)
MoffettNathanson’s Robert Fishman and Michael Nathanson also issued a close read, writing that the news from the Murdoch companies “leaves us scratching our head as to how this helps resolve the undervaluation for Fox. We will look to learn more in the coming days as it seems to us that there should be more to this story as it plays out.”
Signaling some concern, the MoffettNathanson analysts highlighted: “The reason we have felt increasingly comfortable recommending Fox as our only ‘outperform’ among our media coverage is because we have been able to understand exactly what the company is and maybe more importantly, what it isn’t. After the Disney transaction, Fox was left with a uniquely advantageous asset mix focused on live sports and news, which drives stronger affiliate fees and advertising along with an enviable balance sheet and solid cash flows. Fox investors didn’t have to worry about SVOD streaming losses, cannibalizing digital ad growth or a long tail of cable networks to defend in (carriage) renewals!”
But the Wall Street experts have been betting on another deal. “Fox as a standalone company is a very strategic asset for media or digital companies looking for scale in sports rights (led by the NFL, plus Big 10 and other college football conferences, MLB, World Cup and others) and production expertise plus the value of owning a broadcast network with meaningful relative reach advantages within the ecosystem,” Fishman and Nathanson explained. “If no media or digital company shows interest in its assets, we also believe private equity might, given the stability of cash flows and cheap valuation.”
Guggenheim analysts Michael Morris and Curry Baker also weighed in, saying “we see logic in exploring a re-combination,” but like peers shared in a report that “we expect investors to have questions about how consolidation would drive benefits in excess of the risk of further intensifying a perceived under-valuation of the companies’ component assets relative to their stand-alone potential.”
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