Description

LONG: NEWS CORPORATION (NWS / NWSA)

We recommend a long position in shares of News Corp, where abandoned deal talks with Fox and subsequently Costar, and overblown cyclical concerns have combined to cause a dramatic de-rating in the valuation of the company’s “core assets,” excluding the value attributable to publicly-traded REA. Prospectively, we see a significant margin of safety and several avenues for value crystallization or creation, and see fair value in the $25-$30 per share range, 40-70% higher than the current price.

Given multiple pitches on VIC over the last several years, and key assets that are likely well known to most readers, we will refrain from a detailed segment-by-segment business overview. For anyone getting up to speed, the prior VIC pitches and activist Irenic Capital’s November deck (here) provide a great starting point. We’re happy to take any follow up questions and/or flesh out our thinking in the comments.

Pitch:

News Corp shares are down 4% YTD, and ~19% off of February highs, despite 27% YTD appreciation (in USD terms) of its largest asset, a 61% stake in publicly-traded REA. As a result, the discount to NAV has blown out, currently at nearly 40% by our estimate, and shares thus offer a meaningful margin of safety. Framed another way - marking the value of REA to market and backing it out of News’ market cap, the “stub” EV has fallen to <$3.5bn from a peak of $6bn in February. This compares to our conservative estimate of fair value of these assets of $8-9bn.

We believe the current discounted valuation reflects peak uncertainty given a) strategic questions after recent potential transactions have fallen apart and to a lesser extent b) misplaced cyclical earnings concerns. We see the opportunity for the implied valuation of the “stub” (ex-REA) assets to materially re-rate as these concerns abate, and corporate action potentially returns to the fore, driving the stock back into the $20s, and potentially much higher.

Our views are as follows:

1. Fundamental concerns related to a weakening macroeconomic environment are overblown and/or less relevant to the assets that constitute the bulk of NAV.

   1. In the second half of CY-22, News began to experience cyclical headwinds across multiple areas of its business relating to pressure on US and Australian housing markets (impacting Digital Real Estate), weakening advertising demand (primarily impacting News Media & Dow Jones) and a normalization in book consumption post-COVID (impacting Harper Collins). Compounded by adverse FX, earnings estimates have come in across segments, with FY23 EBITDA experiencing a nearly 25% revision since mid-2022.

   2. These headline earnings revisions dramatically overstate the change in value at News Corp, for several reasons:

      1. We can mark-to-market REA, where, as mentioned, stock price performance has been strong and Australian investors are anticipating a reacceleration in trends over the coming year.

      2. Dow Jones’ advertising exposure is now <20% of current revenues, the subscription-based, B2B PIB segment likely contributes >40% of earnings and key peer NYT has seen its stock rally by >⅓ YTD.

      3. Significant cost-cutting efforts across the organization should begin to bear fruit beginning in H2.

   3. As the resiliency of Dow Jones, in particular, becomes apparent via reported results in the coming quarters we expect investors will become more comfortable that News Corp in aggregate is, in fact, less cyclical than it has been historically (when it was heavily skewed to declining print advertising) leading to a re-rating of the implied value of the stub.

2. Abrupt abandonment of News Corp / Fox merger talks and subsequent failure of Costar / Move acquisition talks have likely exacerbated fundamental concerns and contributed to the current dislocation in shares.

   1. Three months after beginning to explore a merger with Fox Corp at the behest of the Murdochs, the two companies announced that talks were being dropped in mid-January. At the same time News disclosed they had been approached by Costar with an offer to acquire News' Move Inc. unit for a reported $3bn (a very attractive price), only for this deal to also fall apart several weeks later. This left News Corp empty handed, and investors without a catalyst.

   2. While the prospect of an all equity News Corp - Fox merger was viewed skeptically by key News Corp holders (including IFP, T Rowe and activist Irenic) we believe News Corp came to be viewed as a beneficiary of any potential transaction by most investors, as demonstrated by the performance of the equity while talks were ongoing. The thinking here was that either Fox would have to pay a large premium to acquire News Corp, or News Corp would have to sell/spin assets to reduce the NAV discount and clear the path to a deal that could be approved by both Fox and News Corp shareholders.

   3. We think the abandonment of deal talks has likely caused a washout of event-oriented shareholders, and contributed to a short-term dislocation of the stock.

3. Looking forward, corporate action seems like to return to the fore, and we see several avenues for significant value-creation and/or realization.

   1. News Corp management have been pursuing an agenda of simplifying the business for the last four years. While progress has been slower than many shareholders would’ve liked, we believe these efforts continue behind the scenes, and frustration with the price-NAV disconnect is growing.

   2. Further, we think the Murdochs have shown their hand and more or less put key News Corp assets in play via the Fox merger talks and subsequent openness to selling Move. There has been reported interest in Dow Jones (Bloomberg) and in Move beyond the Costar approach (there were reportedly other interested parties), creating significant optionality. 

   3. It’s impossible to know for sure, but our best guess is that Rupert desires to consolidate key "legacy" assets (i.e. news and publishing oriented) to simplify succession. Importantly, we do not think that REA/Move are considered to be such assets (this seems very clear after the willingness to engage with Costar). Thus, the logical path forward would be to spin off Move + the REA stake into a separate publicly traded company, which would likely significantly reduce the NAV discount, and make it much easier to negotiate a merger with Fox.

So, over the coming quarters we believe earnings results will prove more resilient than feared. Moreover, while the market has seemingly interpreted the failure of the Fox and Costar discussions as reducing the probability of a value-crystallizing transaction occurring in the relative near-term (next ~18 months), we actually think the net signalling is quite positive.  

Valuation:

Our SotP is presented below. The most important assets with News Corp by far, which represent close to 80% of our estimate of Asset Value (or 120% of current market value when burdened for all net debt and capitalized overhead) are Dow Jones, publisher of the Wall Street Journal, and a 61% stake in REA, the dominant residential real estate listing platform in Australia, where it is publicly traded. Our estimates are moderately below consensus, primarily reflecting a conservative outlook for the advertising market, though we believe are more than sufficient to support a strong outcome for the stock.

The major pieces of the above table should hopefully be self explanatory. We’ve endeavored to err on the side of conservatism throughout. The one exception to this is that we have not tax-affected the REA stake. Management has stated there are tax efficient paths to a separation of REA, but this does not make-or-break our thesis either way. Returns still appear very attractive, and the discount far too wide if we were to lob off $2.50-$3.00 of NAV to account for capital gains taxes.

One key assumption to highlight is the 15x EBITDA multiple used for Dow Jones. This business is most frequently comp’d to the New York Times, which currently trades for ~15x CY24 EBITDA, however unlike the Times, Dow Jones’ generates >35% of revenue and likely >45% of EBITDA from its “Professional Information Business”. On a standalone basis or in a sale we believe these businesses would easily command high-teens to low-twenties type EBITDA multiples based on info services peers. Out of conservatism we’ve used 18x for PIB and 13x for the remaining consumer business (WSJ) which blends to a warranted multiple of just over 15x EBITDA, informing the valuation above.

Risks:

The primary risk to the idea is value destructive capital allocation. We think this is unlikely given the emphasis on simplifying the business and management’s focus on and frustration with the stock’s discounted valuation. However, the Murdoch’s have pursued value destructive (or at the very least unpopular) acquisitions in the past, so we can’t rule it out entirely.

Catalyst

• Earnings Results
• Real Estate spin-off and/or asset sales