Description

We thought it was timely to post News Corp as several key overhangs have caused the company to trade at its cheapest point since the spin in 2013, while catalysts for realizing value now look more probable and near-term, particularly as management’s recent commentary – and actions – have finally inflected to become significantly more shareholder-friendly.

Public markets are currently valuing News Corp at just the value of its stake in publicly listed REA plus the net cash/investments on its balance sheet, in the process attributing zero value to its multiple profitable and cash-generative operating businesses as well as other valuable assets.

We think several overhangs been pressuring News Corp’s public valuation:

• REA has become an increasingly significant portion of the company’s aggregate value over time, but is an asset with a different geography, growth profile and investor base than the rest of the company.
• The merger and resulting financial consolidation of FoxTel and Fox Sport Australia make the company’s valuation and headline leverage appear much greater than reality.  This is compounded by the fact that several sell-side analysts value the combined FoxTel business by taking the enterprise value of that asset and multiplying it by News Corp’s equity stake (65%) and then deducting the full, rather than attributed, value of FoxTel’s debt.  While FoxTel’s ultimate contribution to News Corp’s overall value is modest, this flawed approach incorrectly yields a significantly negative equity value for that asset.
• Ongoing investment at Move means it gets little credit within the company’s aggregate valuation, despite significant asset value.
• Limited disclosure around Dow Jones/WSJ profitability within the News and Information Services segment obscures the significant value of that asset, particularly given the current public valuation of NYT and transaction value for the FT.  The WSJ and associated Dow Jones subscription data services make up the vast majority of NIS profits, but sell-side SOTP valuations will often assign mature local newspaper multiple of 3-5x EBITDA to that segment, even with the NY Times trading at nearly a 20x pension-adjusted EV/EBITDA multiple.
• News Corp is a combination of assets across multiple geographies, sectors and growth profiles, coupled with a complicated corporate structure, which makes analysis of the company complex and headline multiples misleading.

Company Overview:

News Corp is composed of a variety of distinct businesses and assets, and can generally be divided into full owned operating businesses and controlled, partially owned subsidiaries.  

The fully owned operating businesses include:

• News and Information Services Segment:
  • Dow Jones / WSJ – The leading business newspaper and associated data and information services.  While News only discloses DJ revenue, EBITDA can be reconstructed through historical filings / MD&A.  This exercise illustrates that Dow Jones/ WSJ generates a large majority of segment EBITDA.
  • News America Marketing – The business sells advertising through free standing inserts and in-store marketing.  News announced earlier this year that it is currently exploring strategic alternatives for this asset, with private equity the most likely buyer.
  • Other Legacy UK/US/Australia papers – This includes a number of well-known regional publications including the The Australian, The Sun, The Times and NY Post.  While these papers continue to have meaningful headline revenue, given their marginal profitability, they represent a minimal amount of aggregate value within the segment.
• Book Publishing
  • Harper Collins – Following its acquisition of Harlequin several years ago, Harper Collins is the second-largest book publisher.  The business has significant exposure to digital books, and has also been successful in licensing written content for other formats (e.g., TV, movie-rights, etc.).

Controlled, partially owned subsidiaries include:

• REA – REA is the dominant Australian online residential real estate portal and operates a business model where its revenue is primarily generated by real estate sellers paying a moderate listing fee for inclusion, yielding significant networks effects / competitive moat.
• Move – Move is a US-focused online real estate business, with its principal asset being Realtor.com, the second largest US online real estate portal. Similar to Zillow, Move generates revenue primarily from agent advertising / lead generation, though is trying to diversify revenue sources.
• FoxTel – A JV with Telstra in Australia that provides pay TV services and the dominant sports broadcasting network through streaming, wireless and terrestrial distribution.
• News Corp also has a significant net cash and investments position on its balance sheet, as well as potentially valuable real estate holdings (particularly their New Jersey and Australian assets).

Valuation:

From a valuation standpoint, News Corp is at its cheapest level since the spin, trading at basically the value of its REA stake plus net cash and investments.  The charts below illustrate the value of News less its REA stake and the components of News Corp’s combined value in recent years.

As REA has appreciated, it has become a significantly larger portion of the overall value embedded within News Corp.  As a result, at present the value of the News’s stake in REA stake plus its net cash/investments is approximately equal to its public market cap, attributing essentially no value to its core operating businesses (which still generate ~$500mm in EBITDA) or its Move, FoxTel, or real estate assets.

An illustrative sum-of-the-parts for News Corp is below.  The base case is intended to provide a conservative valuation of the assets (in particular valuing Dow Jones and Move at dramatic discounts to public peers and transactions).  While we don’t necessarily expect near-term divestitures of assets like Dow Jones or Move, the Private Market Value case illustrates the significant incremental upside optionality should any of these assets be sold or trade close to peer levels.  With News Corp currently trading close to $13 versus a base case value ~$22 and a private market value of ~$27, there is significant upside in either scenario.

While some of the businesses certainly face challenges, there are few opportunities in today’s markets to purchase assets at ~50 cents on the dollar (or even less vs. private market values).  

While we discuss below why a catalyst appears more likely, the valuation also appears overly penalized in the context of typical holding company discounts – trading at a historically wide discount versus its own history and versus typical holdco discounts.

Recent Management Commentary and Actions:

At the same time News Corp valuation is at its lowest since the spin, we think there has been a recent positive transformation in management commentary and action, and, as a result, catalysts for realizing value have become more probable and near-term.  In particular, management has taken several steps recently that we think mark a change in approach to one more focused on realizing shareholder value.

In June 2019, News Corp announced a strategic review to divest the News America Marketing business.  CEO Robert Thompson also implied the decision was part of a broader effort in comments on the company’s Q4 2019 call:

“We are also acutely focused on simplifying the structure of the company and making clear the full value of the sum of our parts.” 

“…more broadly, we understand when it comes to the News Corp., that this is complex, it's not properly valued. And so we have begun a process of simplification that will be ongoing. The first, most tangible sign of that is the sale process at NAM.”

The commentary about the company’s renewed focus on shareholder value was also emphasized at recent investor conferences – for example CFO Susan Panuccio commented at the BAML conference:

"But the reality is, I guess, over the course of the last couple of years, we've been trading at a significant discount to the sum of the parts, we are aware of that within the company and also the Board, we talk about that.  And anything that we can do that can simplify the structure of the company and even the operations of the company as well it's not just necessarily a structural M&A thing. It can also be from an operational efficiency perspective, I think, would be welcome by the markets and by the investment community and help shine a value light on some of the assets that we have across the group."

Both the strategic review and language mark a significant departure from the past, when the company was much more tight-lipped in addressing its languishing share price.  Interestingly, Thomson also purchased $1 million worth of shares in August 2018 at $14.13, a premium to the current price at a time when REA was ~20% lower than where it trades today.  

Finally, the recent sale of the majority of assets at News Corp’s sister company Fox to Disney and Comcast is another important datapoint.  While Murdoch often has the reputation of never divesting assets and stranding value from shareholders, in reality (and despite long periods of inactivity between them) he’s actually undertaken very significant monetization or separation transactions over time for a variety of reasons (legal, succession planning, strategic, etc.).  In this case, the Fox asset sale also has implications for News, and potentially sets up the companies to recombine some of their assets (more below).

Catalyst

• The first and most probable catalyst is the completion of the News America strategic review.  A sale would enhance management’s credibility and mark the first step in the company’s simplification campaign.  It would also make for a further infusion of cash for a $13 stock with $13 in cash, investments and public holdings per share.  Financial buyers have familiarity with News America’s business model, as its chief competitor Valassis was taken private several years ago.  

• While the timing is more uncertain, we think News Corp has been positioning itself to consolidate and separate its digital real estate assets.  Move, the US online real estate listings site, has been growing quickly but significant investment has obscured some of the bottom-line impact of that growth.  As its embedded within a more mature parent, we think News hasn’t gotten credit from the market for an asset that would be more attractively valued on a standalone basis.
  The most obvious path to realizing value would be to combine Move with News Corp’s other online real estate business REA and pursue a separation.  Interestingly, News Corp recently promoted the CEO of REA to run all of News’s worldwide digital real estate assets (including both Move and REA), simultaneously relocating her from Australia to the company’s headquarters in New York.  Another potential option would be publicly listing Move itself, though we think the REA combination presents a more attractive long-term option.

• FoxTel, News Corp’s jointly owned Australian pay TV business, has been one of the company’s most challenged businesses operationally, as the business has faced pressure from Netflix and other OTT offerings.  The FoxTel structure has also created a lot of confusion for analysts as News Corp consolidates the non-recourse debt that sits at the FoxTel subsidiary level. Furthermore, FoxTel is jointly owned by News Corp and Telstra and both companies have made it clear they would like to partially or fully monetize the asset, driven by Telstra’s desire to exit.  While we’ve assumed it represents a de minimis amount of the SoTP value, FoxTel is currently rolling out its OTT offering (including their sports broadcasting content), and there is certainly upside optionality should it prove successful. This would also facilitate efforts to monetize or IPO the asset as well.

• We think it’s likely the company will increase disclosure around segment profitability to help investors better understand the value within current segments.  Increased disclosure on Dow Jones / WSJ, where its contribution to profitability is disproportionately large versus the headline revenue mix that is disclosed, would go a long way towards highlighting the value of that asset, especially given where public comps trade.

• Finally, following the Fox divestitures, we think the probability has significantly increased that News Corp and the remaining Fox assets are recombined.  Murdoch-owned publications have published sourced articles stating that is Rupert’s eventual intention (e.g. https://www.wsj.com/articles/rupert-murdoch-says-disney-deal-is-a-pivot-not-a-retreat-1513280513) and Rupert himself confirmed that intent is his comments (although the tax structure of the Disney deal means that he has had to be fairly oblique thus far).
  
  Recombining the two businesses makes logical sense, as you have two companies in adjacent industries that share a headquarters building and are controlled by the same shareholder.  News and Fox have ~$500 million of combined corporate costs so the synergies from any deal would be meaningful. Additionally, many of the reasons originally put forth for the split – separating growthier businesses from more mature ones and cleaving off any potential liability stemming from the 2011 UK newspaper matter – are no longer valid now that time has passed and Fox has sold its studio business to Disney.
  
  A recombination would be tax free two years after the Fox/Disney deal closed, which would be March 2021.   We think it’s likely that any recombination will take the form of New Fox tendering for News Corp at a premium and we believe much of News Corp’s renewed focus on boosting its share price may be in anticipation of that deal.  Such a recombination would also likely include a separation of other assets at News, both as the nature/geography of the assets differs significantly (e.g., REA/Move) and potentially as a part of succession planning.