(I actually like the logo)
So there are lots of attractive investment themes at play here for the new News Corp: (1) a smaller unwanted spinoff that was designed to showcase the larger parent's more attractive growth businesses, (2) an owner/operator that is financially committed to the business, (3) an out of favor business with a clean balance sheet and attractive non-core assets that provide a margin of safety.
As I'll layout below, the new News Corp features several non-newspaper assets and a cash heavy balance sheet that when accounted for on a sum of the parts basis roughly equal the entire market capitalization of the company, so you get the newspaper businesses for "free" which generate over 70% of the company's revenues. While the "for free" argument has significant flaws, when that business is the vast majority of News Corp it makes it a much more compelling thesis.
Cable Network Programming (Fox Sports Australia) & Foxtel
Australia is a rabid sports nation and News Corp owns its largest sports cable channel family in Fox Sports Australia, which is comparable to ESPN's dominance in the U.S. but on a smaller scale as Australia only has 23 million people. The cable channel business is still an attractive one as content providers get the dual income stream of subscription fees and advertising revenue.
Additionally, News Corp along with Telstra Corp, Australia's largest phone company, each own 50% of Foxtel which was formed in 1995 and is an Australian pay television company operating cable, direct broadcast satellite television and IPTV services. Foxtel is a dominate player in this space with over 2 million subscribers or roughly 30% of Australia's market.
In September 2012, News Corp purchased Consolidated Media Holdings in Australia for roughly $2B, doubling their stake in both Fox Sports (from 50% to 100%) and Foxtel (from 25% to 50%).
Extrapolating this valuation to News Corp's entire stake and you get roughly a $4B valuation for this segment. It's interesting that this segment was included in the News Corp spinoff and didn't remain with 21st Century Fox with the rest of the TV and entertainment assets. The company cites synergies with the publishing and media assets, but I would guess its more to provide an attractive asset or two (along with REA Group below) to carry the newspaper and publishing assets until there is a clearer path to monetizing the shift to digital.
Digital Real Estate Services (REA Group)
News Corp owns a 61.6% stake in the largest residential property website in Australia, REA Group (REA.AX), another non-core asset. REA Group owns and operates Australia's largest residential property website, realestate.com.au, and Australia's largest commercial property site, realcommerical.com.au, which together have approximately 20.6 million desktop visits each month. Many believe that Australia remains in the midst of a large real estate bubble, the topic has its own detailed Wikipedia entry even though it hasn't popped yet. A down turn in Australian real estate values would presumably have a negative impact on REA Group's value as its been a pretty high flyer momentum stock, but its growth is nonetheless impressive.
REA Group is publicly traded on the ASX and has a market capitalization of A$5.38B implying News Corp's stake is worth $3.2B. News Corp consolidates REA Group on its balance sheet, but doesn't have an intention of acquiring the remaining minority shareholders and is content to collect the dividend. I'm a little skeptical on the synergies between REA Group and News Corp's other Australian assets and would welcome a sale of their stake given the overheated real estate market.
Book Publishing (HarperCollins)
News Corp operates HarperCollins the second largest English language publisher, which publishes over 200 best sellers every year. In their stable are many of the popular fiction, children's and religious authors.
The book publishing industry is changing rapidly due to e-readers and tablets as more consumers download book content digitally. Unlike the music industry where digital downloads essentially eliminated the album format and consumers chose to buy individual songs instead, consumers can't really do that with books, you don't buy only the 3rd chapter of a bestseller, you still buy the entire book. This means the book publishing industry actually benefits from digital revenues as their margins increase as the production costs, return costs, and working capital needs (inventory) are much lower. Below is a slide from News Corp's initial investor presentation showing the margin differential between hardcover books and digital copies, the difference between the two was surprising to me.
News Corp's book publishing business generated $142MM of EBITDA in fiscal 2013, putting a reasonable 7x multiplier implies a value of $1.0B for the unit.
21st Century Fox was generous to the new News Corp and left it with a strong balance sheet featuring approximately $2.5B in cash and no debt. News does have an underfunded pension liability, but with interest rates likely to rise over the near to medium term, the liability should be less of an issue as interest/discount rates rise reducing the accounting value of the pension benefits.
Sum of the Parts w/o the News Divisions
So the main thesis, that purchasing shares today essentially gives you the newspaper assets for free, is laid out below. The values below might be on the high side based on the control premium that News Corp had to pay for CMH and the potential bubble of real estate prices in Australia inflating the market price of REA Group, but I think it still clearly illustrates the remaining newspaper businesses within News Corp are being considerably undervalued.
So without any consideration for the News and Information Services business and the optionality of the Amplify digital education business, the other assets of News Corp values are greater than the current market capitalization ($9.72B) of the entire company. So with that in mind, below are the assets the market is heavily discounting and could represent significant value if News Corp is able to drive revenue growth through digital platforms.
News and Information Services
The News and Information Services division of News Corp generated over $6.7B in revenue last fiscal year (~75% of the overall company), for $795MM of EBITDA, so despite the challenges facing the industry at large as people continue to move away from print to (mostly free) digital, this segment has tremendous value. News Corp, and specifically The Wall Street Journal, as been on the forefront of the switch to digital and actually being able to charge for their content. The real value driver for this business segment will be whether News Corp is able to take that model and apply its other papers in the UK and Australia.
Dow Jones & New York Post: Back in the pre-Great Recession days the old News Corp purchased Dow Jones for $5B in 2007, its probably worth substantially less now but its also worth noting that The Wall Street Journal has also grown its circulation by 8% CAGR during that time (graphic below), when most other newspapers have been struggling. The Wall Street Journal is the number one daily newspaper in the U.S. by circulation, and has been proactive from the beginning in creating a valuable pay wall online where others have had difficulty making the transition. WSJ is a strong brand with a focused demographic where many of its subscribers are not price sensitive (for instance, my work reimburses me for my subscription) giving News Corp ample room to raise prices in the future. Dow Jones also has an institutional business, the model here is to create a Bloomberg like service where customers pay for real time business news, analysis and statistical data.
News International (UK): News Corp is #1 by print sales in the UK with 35% market share, it operates the #1 tabloid in the UK in The Sun, the #1 quality Sunday newspaper in The Sunday Times, and one of the top quality dailies in The Times. The UK operations reputation was given a significant black eye after the phone hacking scandal at The News of the World in 2011.
Early in 2013, News International gave a glimpse at its strategy when it acquired the rights to online and mobile highlights of English Premier League matches for three years. It will show them on the websites and mobile apps of its three remaining newspapers. The Sun recently started charging for digital subscribers 2GBP per week for its content, it will be interesting to see how well this strategy works in the next few quarters.
News Corp Australia: News Corp owns a smattering of newspaper and magazines in Australia, including daily newspapers in each of the major cities (The Daily Telegraph - Sydney, Herald Sun - Melbourne, The Courier Mail - Brisbane, The Advertiser - Adelaide) and the only national newspaper in The Australian. As of June 30, 2013, its daily, Sunday, weekly and bi-weekly newspapers accounted for more than 59% of the total circulation of newspapers in Australia. The Australian newspaper assets probably have the furthest to go in the switch to digital, but at least management has a playbook to work off of and the desire to institute the pay wall model.
How much these business are worth is pretty hard to say given the rapid change going on in the industry, their declining revenues, but you don't have guess someone's weight to know they're fat, I believe the market is being unfair and valuing these businesses close to zero.
Core EV/EBITDA (ex-Foxtel, Fox Sports, REA Group)
Another way to look at the valuation would be to strip out the non-core publishing assets (Foxtel, Fox Sports Australia and REA Group) and look at the EV/EBITDA valuation the market is putting on the core newspapers and book publishing businesses.
Despite what News Corp says publicly, the Australian TV and RE assets seem rather non-core and appear to be included in the new News Corp in order to temporarily support the struggling publishing assets. As a natural contrarian, I'm attracted to these publishing assets, but also appreciate the margin of safety provided by the non-core assets.
Capital Allocation, Previous News Corp Mistakes, and Amplify
Other miscellaneous stuff that should be mentioned when talking about the new News Corp: At the time of the spinoff, the new News Corp authorized a $500B share repurchase plan to support the stock in the event that holders would elect to sell their shares in the publishing business. As of the 6/30 fiscal year end, News Corp has not repurchased any common stock. News Corp will likely pursue some acquisitions although its unclear what form they will come in as they would likely face regulatory scrutiny over any newspaper purchases in their current markets. There is some risk to having this much cash burning a hole in Murdoch & Co's pockets as evidence by the $5B price tag they paid for Dow Jones in 2007, and the even worse $580MM News Corp paid for MySpace before wrecking it and selling it for $35MM in 2011.
News Corp is heavily investing in their educational start up that hopes to reshape the way K-12 is taught in America through digital content delivery. In fiscal 2013, Amplify featured a $163 million EBIT loss. This investment is a long term one, also one that operates in an industry with a lot of entrenched (union labor) interests that are averse to change. While it is strange that the education sector has been exempt from technological change, much of the free cash flow of News Corp is going to Amplify, so an investment in News Corp rests somewhat on their ability to create a profitable and useful benefit (unlike most of the for-profit sector) in this segment. Expect additional losses for the next 2-3 years, although management has indicated that starting with the 2014 school year, we should see some progress on Amplify's adoption level.
In totality, I'm willing to bet on Rupert Murdoch's attempt to recreate the magic in the new News Corp and rebuild his legacy after the UK phone hacking scandal. The non-core assets that were included in the spinoff provide a nice margin of safety giving management a little time to monetize their undervalued and underutilized newspaper/digital content brands. I would put the initial fair value at least 50% higher, and potentially more if the market warms to digital content assets like the ones in News Corps portfolio.
Disclosure: I own shares of NWSA (purchased today at a cost basis of $16.76). NWSA are the non-voting class A shares, NWS are the voting class B shares, otherwise they are economically the same.
Great post. Love the recommendation for a long term holding with great potential value.ReplyDelete
I think the success or failure of this company rests squarely on the shoulders of the management team. This is not a ho-hum business that will run itself. With the unique mix of assets and a large cash position, management has a great opportunity to take a blank slate and create great value. There is nobody in the industry I would rather have at the helm than Murdoch. Albeit his age may come into play in the next few years.
I agree its a turnaround story and will take a few years to play out fully. I failed to mention that Murdoch tapped the former head of Dow Jones, Robert Thompson, to be the CEO of the new News Corp. He has mentioned on several calls he's focused on "relentless cost cutting" and "obsessed with cash flow". So I doubt he'll let struggling papers just maintain the status quo for long now that the newspaper business is more exposed in the new structure. Under his leadership, Dow Jones was really able to monetize the digital business more than anyone else, he seems like a natural choice to lead the efforts across all the news businesses.
Nice write-up. Would you happen to have an update? I did my own numbers today and I am getting a range of 22-26 for the equity. Its actually quite hard to back out to a valuation of 15/sh -- it implies very low EBITDA multiples for the various businesses.ReplyDelete
Also interesting -- though unsure how relevant -- look at the charts for NWS and the AUD and the correlation is uncanny.
I agree, I get roughly the same valuation, mid-$20s. I did a quick update and grouped it together with some other newspaper spinoffs a couple months ago: http://clarkstreetvalue.blogspot.com/2014/08/newspaper-spinoffs.htmlDelete
This was before the Move acquisition, which I haven't spent much time on, any thoughts there?
The correlation with the AUD is interesting, and the Australian exposure does concern me as its economy has been seemingly overheated for years, the air is coming out of China, commodities, etc. Thanks for the comment.