NEWS CORP NWSA S
October 14, 2011 - 3:50pm EST by
Coyote05
2011 2012
Price: 17.12 EPS $1.00 $1.10
Shares Out. (in M): 2,636 P/E 17.0x 15.5x
Market Cap (in $M): 45,128 P/FCF 0.0x 0.0x
Net Debt (in $M): 2,815 EBIT 5,017 5,350
TEV ($): 47,943 TEV/EBIT 9.6x 9.0x
Borrow Cost: NA

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Description

This is a simple idea.  Short NWSA, long NWS.  These two securities are economically equivalent, except that NWS has voting rights while NWSA does not.  Rupert Murdoch, Chairman and CEO, holds close to 40% of all outstanding NWS shares.

NWS and NWSA are currently trading at the same price.  Clearly this does not make economic sense as NWS is a superior security due to its voting rights.  Also, ceteris paribus one would prefer to hold the exact same security as Rupert Murdoch.

Both shares pay the same dividend.  Historically, this was not the case; NWSA paid a higher dividend than NWS.  However, this changed in 1q08.  Since then both securities have paid the same dividend.  And it seems that this will continue to be the case going forward.

There is plenty of liquidity in the shares; especially in NWSA.

Looking back as far as January 2000, NWS has always traded at a premium to NWSA with one brief exception in 3q08.  My guess is this happened because of the market dislocation that occurred then.  The premium was quickly reestablished.  By 1q09, NWS was trading within its normal average premium range around 10%.

From 1q00 to 1q04 the premium was 15-20%, from 2q04 until 3q08 it oscillated around 5%. From 3q08 it bounced back hard to reach almost 20% by 2q09; staying in the 12-17% until 1q11.  From then it has decreased to the current level.

In my view the premium has contracted because of the recent market correction on top of the company's share repurchase activities.  The company did not buyback any stock in the three-year period ending on June 30, 2011.  Starting in July 2011, the company commenced a $5b repurchase program with the intention of executing it within twelve months.  Because of its discount and liquidity, NWSA was naturally the best buyback target.  As of today, the company has repurchased close to $1.5b NWSA.  At or below the current premium, however, it is only logical for management to repurchase NWS.

Historically, buybacks and market dislocations are highly correlated with premium contractions.  The table below shows the amount of buybacks and the NWS premium range:

FY  -  buyback $b  -  premium range

fy03  -  0  -  >17%

fy04  -  0  -  10-20%

fy05  -  0.5b (50/50 NWSA, NWS all Jun05)  -  1-8%

fy06  -  2b (1.3 NWSA, 0.7 NWS)  -  4-7%

fy07  -  1.3b NWSA  -  3-8%

fy08  -  0.9b NWSA  -  1-8%

fy09  -  0  -  0-19%

fy10  -  0  -  15-19%

fy11  -  0  -  3-16%

 

Inevitably from time to time there are other factors that could affect the premium.  The recent News of the World scandal and its repercussions is an example.  However, these are transitory factors and do not seem to weigh heavily on the longer term premium.

I expect the premium to bounce back, at least to some extent, once the buyback approaches completion.  At the current pace ($1.5b per quarter), this would be the end of 1q12.  Another element that could positively affect the premium is the buyback of NWS shares and the corresponding disclosure.

In summary, I see minimal downside on the possibility of making 10% in six months in a trade with plenty of liquidity and an identified catalyst.

Catalyst

- $5b buyback completion
- buyback of NWS shares and corresponding disclosure
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    Description

    This is a simple idea.  Short NWSA, long NWS.  These two securities are economically equivalent, except that NWS has voting rights while NWSA does not.  Rupert Murdoch, Chairman and CEO, holds close to 40% of all outstanding NWS shares.

    NWS and NWSA are currently trading at the same price.  Clearly this does not make economic sense as NWS is a superior security due to its voting rights.  Also, ceteris paribus one would prefer to hold the exact same security as Rupert Murdoch.

    Both shares pay the same dividend.  Historically, this was not the case; NWSA paid a higher dividend than NWS.  However, this changed in 1q08.  Since then both securities have paid the same dividend.  And it seems that this will continue to be the case going forward.

    There is plenty of liquidity in the shares; especially in NWSA.

    Looking back as far as January 2000, NWS has always traded at a premium to NWSA with one brief exception in 3q08.  My guess is this happened because of the market dislocation that occurred then.  The premium was quickly reestablished.  By 1q09, NWS was trading within its normal average premium range around 10%.

    From 1q00 to 1q04 the premium was 15-20%, from 2q04 until 3q08 it oscillated around 5%. From 3q08 it bounced back hard to reach almost 20% by 2q09; staying in the 12-17% until 1q11.  From then it has decreased to the current level.

    In my view the premium has contracted because of the recent market correction on top of the company's share repurchase activities.  The company did not buyback any stock in the three-year period ending on June 30, 2011.  Starting in July 2011, the company commenced a $5b repurchase program with the intention of executing it within twelve months.  Because of its discount and liquidity, NWSA was naturally the best buyback target.  As of today, the company has repurchased close to $1.5b NWSA.  At or below the current premium, however, it is only logical for management to repurchase NWS.

    Historically, buybacks and market dislocations are highly correlated with premium contractions.  The table below shows the amount of buybacks and the NWS premium range:

    FY  -  buyback $b  -  premium range

    fy03  -  0  -  >17%

    fy04  -  0  -  10-20%

    fy05  -  0.5b (50/50 NWSA, NWS all Jun05)  -  1-8%

    fy06  -  2b (1.3 NWSA, 0.7 NWS)  -  4-7%

    fy07  -  1.3b NWSA  -  3-8%

    fy08  -  0.9b NWSA  -  1-8%

    fy09  -  0  -  0-19%

    fy10  -  0  -  15-19%

    fy11  -  0  -  3-16%

     

    Inevitably from time to time there are other factors that could affect the premium.  The recent News of the World scandal and its repercussions is an example.  However, these are transitory factors and do not seem to weigh heavily on the longer term premium.

    I expect the premium to bounce back, at least to some extent, once the buyback approaches completion.  At the current pace ($1.5b per quarter), this would be the end of 1q12.  Another element that could positively affect the premium is the buyback of NWS shares and the corresponding disclosure.

    In summary, I see minimal downside on the possibility of making 10% in six months in a trade with plenty of liquidity and an identified catalyst.

    Catalyst

    - $5b buyback completion
    - buyback of NWS shares and corresponding disclosure
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