Analyst Upgrades Fox on NFL "Clarity," Deal Potential

Lachlan Murdoch
Jon Kopaloff/WireImage

Lachlan Murdoch

"While we currently don't see M&A as real enough to translate to a bullish stance, it's an opportunity we're keeping an eye on given 21st Century Fox's unexpected sale to Disney," writes Wells Fargo's Steven Cahall.

Fox Corp.'s stock earned an upgrade on Wednesday thanks to the sports rights cost "clarity" provided by the recent NFL rights renewal and its role as "a potential participant in media M&A."

Wells Fargo analyst Steven Cahall upgraded the shares of Fox, led by CEO Lachlan Murdoch, from "underweight" to "equal weight" and his price target by $14 to $41 writing in a report: "We've historically been bearish on sports as rights tend to grow in excess of linear revenues, and Fox has been the media stock with the most sports leverage."

But he highlighted that "we now see the new NFL deal as a clearing event with our out-year TV estimates moving up significantly," adding that "from here, M&A could be an opportunity." Plus, he noted that sports betting could also "create future value."

The Wall Street observer noted the abandonment of Thursday Night Football in Fox's new NFL deal to estimate sports rights costs will increase "at a 12 percent compound annual growth rate between fiscal year 2018 and fiscal year 2023," followed by a 13 percent decline to $5 billion in fiscal year 2024. "Fox is also the only NFL rights holder that doesn't appear to be pushing most games onto over-the-top, which makes us more bullish than peers on continued strength in retrans and reverse compensation revenue growth," Cahall said.

The analyst noted that since a recent Financial Times article discussing the potential future of Fox and News Corp now that media tycoon Rupert Murdoch is 90 "investors have a renewed interest in Fox as a potential participant in media M&A," even though the company has not commented on its appetite for any deals. But Cahall's report included "an illustrative break-up analysis that implies $55 per share" in value "based on a nine times enterprise value/operating income before depreciation or amortization for Fox News, 8.5 times for the stations and the Fox network and cable sports (FS1/FS2) valued at $5 billion." Fox's stock had closed at $37.05 on Tuesday.

Concluded Cahall: "While we currently don't see M&A as real enough to translate to a bullish stance, it's an opportunity we're keeping an eye on given 21st Century Fox's unexpected sale to Disney."