Description

Today’s News Corp was spun off from Rupert Murdoch’s original News Corporation in 2013. The parent changed its name to 21^st Century Fox, whilst the spin-off assumed the original name. 21^st Century Fox inherited entertainment-focused assets such as the Fox broadcast network and 20^th Century Fox film studios. Most of this company was later sold to Disney in 2019. The new News Corporation (News Corp) inherited a collection of businesses skewed towards more traditional media. News Corp consists of five segments: Dow Jones, Digital Real Estate Services, Book Publishing, News Media and Subscription Video Services.

Dow Jones

Dow Jones accounts for the largest part of our News Corp valuation.

The flagship property of Dow Jones is The Wall Street Journal, which accounts for most of the segment’s revenue. Dow Jones also includes smaller consumer properties such as Barron’s and MarketWatch, as well as a B2B business offering business news wires, risk & compliance and other services.

The Wall Street Journal is the second largest newspaper in the US by subscribers, with 3.1 million as of September 2020 (behind The New York Times with 5.5 million). The US newspaper industry as a whole has been devastated by the internet; circulation peaked in the 1980s at over 60 million papers sold per day, gradually declining to around 55 million by 2000 before dropping dramatically to fewer than 30 million by 2019. Newspaper ad spend has fared even worse, dropping from a peak of over $70 billion per year in 2000 to less than $15 billion by 2019.

Despite this backdrop, a select few large national newspapers have found significant success with digital subscription businesses in recent years. The long-term effect of the transition to digital has been to divide the newspaper industry more starkly into national (even international) winners and regional losers.  The successful titles are finding a broader addressable market which no longer requires a physical presence (print and distribution assets) to service.  As they grow and generate significantly superior cashflow and returns on capital, they are also able to further cement their dominance by attracting the best quality journalists, investing heavily in technology and building a subscriber base which they can understand well (through usage monitoring) to sell more content and product.   The New York Times is perhaps the most high-profile of these, having grown digital subscribers from under a million in 2014 to nearly five million today and commands an earnings multiple in excess of 50x as the market anticipates much more growth to come.

The Wall Street Journal, also, has succeeded in adapting its business model to the digital era. Digital subscribers have more than tripled from 700,000 in 2015 to over 2.3 million today. This has more than offset a loss of nearly 500,000 print subscribers over the same timeframe. The mix shift away from print is accompanied by decreasing capex intensity and improving margins as the digital business is both asset light and less costly to produce and distribute. This combination of factors has a powerful impact on free cash flow, which is just starting to show through in News Corp’s financials.

Digital Real Estate Services

This segment consists of News Corp’s 62% stake in REA and 80% stake in Move (the remaining 20% of Move is held by REA).

REA operates the market-leading digital real estate portal in Australia, realestate.com.au. REA traditionally made most of its money by charging a subscription to estate agents to list properties on its site and thereby attract interest from buyers. Several years ago, the company switched its focus towards a new model based on charging property vendors per listing, a fee which is collected by the estate agent, which now acts as a distribution partner.

Like many other online portals, REA’s business benefits from strong two-sided network effects. Popularity with consumers makes the site more attractive to vendors as a place to list their property; the larger selection in turn attracts more consumer traffic, which in turn attracts more vendors and so on. This dynamic tends to create a very strong market leader, a strong no. 2 player and leaves very little space for a third. The Australian property portal market is no exception. REA dominates with more than twice the consumer traffic and 3x the revenue of Domain, its smaller competitor. This feeds into a scale advantage, allowing REA to outspend its competitor in marketing and technology investment to further entrench its dominant position. The property portal business is also highly scalable with minimal marginal cost; the technology investment required to build and maintain a sophisticated portal is significant, but the cost of adding each additional listing to the site is minimal. This has resulted in impressive operating leverage as the busines has grown; EBITDA margins fifteen years ago were a healthy 19% but have since more than doubled to nearly 50%.

REA’s moat is wide and easily recognized. It is more challenging to project its growth. The key drivers for this are volume of houses sold and amount spent per listing on REA. Transaction volumes have been decreasing in recent years as Australians have extended their average house holding period from around eight years a decade ago to more than eleven years today. House prices have become ever more expensive and stamp duty taxes have increased, discouraging homeowners from moving too frequently.  REA has more than compensated for decreasing volumes with increased price; homeowners are willing to spend to get the best possible price for such a significant life event and REA’s offering has proven more effective than legacy print advertising in attracting buyer attention.

Move operates realtor.com, the no. 2 real estate portal in the US, behind zillow.com. The US property portal market is structurally less lucrative than the Australian market because listings are freely available via Multiple Listing Services so the revenue model is limited to charging real estate agents fees for leads. Move accounts for a single digit percentage of News Corp’s look-through EBITDA.

Book Publishing

This segment consists of HarperCollins, the second largest consumer book publisher in the world behind Penguin Random House, with Simon & Schuster in third place. Combined, these three account for nearly half of all print books sold in the US by volume.

The consumer book publishing business has proven stable over the last decade, despite the inexorable growth of Amazon. HarperCollins has posted low-single digit growth over this period, with improving margins, driven by the mix shift towards digital books. In 2012, digital books accounted for c. 16% of HarperCollins sales and EBITDA margins were 7%. In FY 2020, digital books accounted for 23% of sales and EBITDA margins were 13%. Much of this margin gain has come from the elimination of print inefficiencies from improved return rates and lower manufacturing costs.

The pandemic has favoured digital sales in book publishing, as in other parts of the economy. Digital sales growth was 7% prior to the pandemic and has since accelerated to 20%. Audiobooks have been especially strong within digital, growing at 26% year-on-year in the most recent quarter. Nonetheless, we think it is unclear how long-lasting this trend will prove.

News Media

It is the “trophy” titles within the News Media segment which are most associated with News Corp and the Murdoch family: the UK’s Times and The Sun, the Australian and the New York Post. However, in our view this segment represents a very small component of intrinsic value for News Corp.  In addition to those titles, New Corp Australia publishes over one hundred local Australian newspapers.

The shift away from print to online has been a significant headwind to this business.  Nonetheless, management has demonstrated discipline in tackling the problem. Since the spin-off, News Corp has reduced annual operating costs by around two billion dollars. In fiscal 2020 alone, headcount within News Media was reduced by 12% when the company shut down print operations at most of the company’s regional and community papers in Australia. Additional cost cuts are expected in 2021 as management right sizes the business to adapt to further declines in print revenues. Digital revenues are growing; more than 2/3rds of subscriptions at The Australian and The Times (UK) are now digital and digital subscriptions across News Corp Australia rose 25% in FY 2020. So far, this has not been sufficient to support net growth in the News Media segment, but management believes this can be achieved before too long.

Subscription Video Services

This segment mostly consists of News Corp’s 65% stake in Foxtel, the largest Pay-TV provider in Australia.  Like other cable franchises globally, the business has been losing traditional subscribers, but gaining subscribers in recently launched internet streaming services. The net effect has been a decrease in both subscribers and revenue. It remains to be seen whether Foxtel will find long-term success with its pivot to streaming. Accordingly, we model the business very conservatively, projecting continual declines.

Foxtel carries $1 billion of debt on its balance sheet, which also appears on News Corp’s accounts owing to the consolidation of News Corp’s 65% stake. This debt, however, is non-recourse to the parent and management has no plans to provide the business with any additional funding, moreover they have expressed interest in selling the business.

Management

We view the Murdoch involvement in the business as a modest positive today.  Although founder owned, there has been a chequered history of capital allocation, which appears to have been somewhat influenced by an enjoyment of the political influence that comes from owning assets like the Sun, Times and the Australian.  Today, the direction of travel is a positive one.  The company is shedding assets and scaling back from loss making enterprises whilst focusing investment on a more clearly defined core of subscription digital media titles and property portals.  Disclosure to investors is also improving.  The additional detail provided about Dow Jones has helped Wall Street analysts to understand the business better. 

Valuation

News Corporation has a market capitalization of around $11 billion. Its 62% stake in REA has a publicly traded market value of around $8 billion. The New York Times (the closest comparable public business to Dow Jones) has a market capitalization of around $8 billion, with roughly the same revenue, EBITDA and growth rate as Dow Jones. On the basis of these two segments alone, therefore, there is a simple argument to suggest that News Corporation should be trading for at least $16 billion, before considering the value of HarperCollins, Foxtel or Move. 

Simon & Schuster, a book publishing competitor less than half the size of HarperCollins by revenue, was recently acquired for over $2 billion, so a $2bn valuation for HarperCollins as well seems very comfortable (roughly 10x pre-tax cashflow).

Foxtel is a currently declining business with pre-tax free cash flow of c. $125m, so a conservative valuation is warranted. A 4x multiple would value it at $500m.

Zillow is the no. 1 player in Move’s market with more than double the digital real estate revenue. The company is not yet profitable but has a market capitalization of over $30 billion. Domain, the no. 2 competitor to REA in Australia, has 30% of REA’s revenue and a market cap of around 10% of REA. Valuing Move similarly at 10% of Zillow, the US market leader, would give a value of $3bn. REA owns 20% of this, so to avoid double-counting, say $2.4bn.

Additionally, News Corp has over $1 billion of net cash on its balance sheet.  Adding all of the above together: $8bn (REA stake) + $8bn (Dow Jones) + $2bn (HarperCollins) + $0.5bn (Foxtel) + $2.4bn (Move stake) +$1bn of net cash gives a total valuation of close to $22bn, double News Corp’s current market cap of $11bn. This is without attempting to value the News Media business.  It takes the concept of the “conglomerate discount” to new levels.

Catalyst

IPO/sale of real estate, or subscription video assets

Sustained digital growth in Wall Street Journal

Return to profitability in News Media