Description

New News Corp (“NWSA” – $16.00) - Long

A prisoner exchange has occurred in shares of New News Corp over the last month – the classic result of a mega-cap company having spun off its smaller, less-exciting division. We believe that since when-issued trading in NWSA began (6/19/13), growth investors in Old News Corp have been dumping NWSA shares into the market at a rapid pace, causing downward pressure on the stock and presenting a fat pitch for value investors who can look at the company with a fresh set of eyes. With a great balance sheet providing both margin of safety and potential catalysts, the risk/reward in NWSA is compelling. Our view is that the stock has very limitted downside and that over the next 12 months the stock could be worth as much as $25 per share.

Business Summary

NWSA is a collection of global media assets with renowned brands in publishing, information services, cable sports, cable service, and digital real estate classifieds.

Publishing

On the publishing side of the business, NWSA has a News and Information Services segment (Dow Jones, The Wall Street Journal, Barron’s, The New York Post, The Sun, The Times, The Daily Telegraph) and a Book Publishing segment (HarperCollins).

It is no secret that physical newspaper circulation and its advertising revenues have been under pressure as other methods of receiving information become available and popular. That is why NWSA has employed a strategy to monetize its valuable content by using a hard paywall for online access to articles and by executing a severe cost-cutting program at less-valuable publications. Management is focused on maximizing the FCF of these “undervalued and underdeveloped assets” (Rupert Murdoch at the New News Corp spinoff roadshow).

At HarperCollins, management has been able to steadily increase margins and EBITDA overall in recent years, taking advantage of the transformation by many consumers to e-books. Despite slight revenue declines in 2011 and 2012, the book publisher appears to have reached an inflection point and grown revenue in 2013 (year end 6/30/13). NWSA management has been at the forefront of accepting the digital revolution and exploring ways to maximize the benefits digitization offers across its publishing asset base. We expect this to continue and that over time, NWSA will begin to grow top line and expand its margins in all of its publishing businesses.

Non-Publishing

Despite being viewed as a publishing company, NWSA actually owns several other valuable assets inAustraliathat will contribute ~45% of 2014 segment EBITDA. As a result of past acquisitions, NWSA holds 100% of Fox Sports Australia (#1 cable sports network), 50% of Foxtel (monopoly cable provider), and 62% of REA Group (“REA AU”; digital real estate classifieds).

Fox Sports Australia and Foxtel are high quality, growing businesses individually. However, owned together, these two assets provide NWSA with significant competitive advantages when it comes to pay TV inAustralia. By controlling the monopoly cable provider in Foxtel, NWSA has locked in distribution for Fox Sports. Alternatively, Fox Sports – whose channels are among the most popular in the Australian TV market – is basically offered only to Foxtel subscribers. Having both businesses under one roof has created a virtuous circle for NWSA and there is significant headroom inAustraliato increase penetration. Only 30% of the market subscribes to pay TV, as compared to 85% in theU.S.Furthermore, Foxtel has focused on driving annual revenue per user (“ARPU”) growth for the last several years by expanding its high-margin value added services (HD, multi-room, etc) and by raising prices. These are good businesses and we expect continued growth and margin expansion for both.

REA is an online listed real estate classifieds and advertising operation primarily inAustralia. The customers for this business are real estate agents who pay an annual subscription fee to post their listings. Interestingly, REA has been able to double its ARPU and almost quadruple its EBITDA over the last 5 years by selling agents incremental services such as enhanced listings, featured properties, and search placement preferences. These premiere options are value-add to the agent and the revenue it brings in drops almost 100% to the bottom line for REA. For NWSA, this is a unique asset that provides high-margin growth and gives the overall corporation more of a footprint in the global digital transformation.

NWSA also owns an education company called Amplify that it purchased for $360MM. This business currently loses money and we exclude its results from our estimates. Amplify creates digital products and services for the K-12 education sector. NWSA believes this company will eventually revolutionize the relationship between students, teachers, and their curriculums.

Valuation

We have valued the company on a Sum-of-the-Parts basis and view the risk/reward as compelling. At $16.00 per share, NWSA is trading for only 4.7x 2014 Consolidated EBITDA. Our view is that the consolidated company is being viewed as a low quality publishing business, despite the non-publishing assets contributing almost half of 2014 segment EBITDA. By comparison, New York Times (“NYT”) trades for 6.3x 2014 EBITDA and we believe this is a good comparable for NWSA’sU.S.publishing unit. Therefore, we value the News and Information segment at 4x-6x 2014 EBITDA, which takes into account the lower quality Australian andU.K.publishing assets. We apply the same 4x-6x multiple range for the Book Publishing business, with competitors trading ~6x.

The Cable Network Programming segment (ie, Fox Sports Australia) deserves a range of 8x-12x 2014 EBITDA, using publicly traded cable stations which trade for 10x-12x 2014 EBITDA as comparables. For Foxtel, 6x-8x is appropriate compared to other cable providers which trade at 7x-8x. REA, currently trading at 18.5x 2014 EBITDA, gets a full market multiple due to its impressive revenue growth (15%-25% annually) and rich EBITDA margins (close to 50%). Given potential weakness in the Australian economy, we use a conservative 12x-18x range.

Below is our Sum-of-the-Parts analysis. Note that we are valuing Amplify and the Other Investments at zero in our Downside Case. For our Base Case, we value them at half of the purchase price for Amplify ($360MM) plus half of the carrying value of the Other Investments as of 6/30/2012 ($332MM). And in our upside case we give 75% credit.

Our view is that we have used conservative multiples and that there is essentially no downside to the stock. And if the company executes from an operational perspective this stock has more than 50% upside to $25 per share. Management has stated that they will be focused solely on generating FCF and using the cash balance to create value. The company has a $500m buyback authorization in place and expects to announce a regular dividend as well. However, a more significant driver of the stock could end up being accretive, strategic, smart acquisitions. Management has been clear about its goal of adding more content to its portfolio – likely a digital or video asset that could be disseminated throughout its network of publishing and cable assets. We believe market sentiment around this company is mostly negative, and that any good or great uses of cash will drive the stock significantly. For that reason, we believe there is actually potential upside on the stock of $25-$30 per share depending on what the company chooses to acquire. We believe NWSA is an attractive opportunity for any value investor taking a fresh look.

Several catalysts could drive the stock higher over the next 12 months, including:

• Prisoner exchange from growth investors to value investors ends
• Announcement of a regular dividend policy
• Buying back stock
• Making accretive acquisitions

Catalyst

Several catalysts could drive the stock higher over the next 12 months, including:

• Prisoner exchange from growth investors to value investors ends
• Announcement of a regular dividend policy
• Buying back stock
• Making accretive acquisitions