|Shares Out. (in M):||596||P/E||0||0|
|Market Cap (in $M):||7,997||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
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We thought it was timely to post News Corp as several key overhangs have caused the company to trade at its cheapest point since the spin in 2013, while catalysts for realizing value now look more probable and near-term, particularly as management’s recent commentary – and actions – have finally inflected to become significantly more shareholder-friendly.
Public markets are currently valuing News Corp at just the value of its stake in publicly listed REA plus the net cash/investments on its balance sheet, in the process attributing zero value to its multiple profitable and cash-generative operating businesses as well as other valuable assets.
We think several overhangs been pressuring News Corp’s public valuation:
News Corp is composed of a variety of distinct businesses and assets, and can generally be divided into full owned operating businesses and controlled, partially owned subsidiaries.
The fully owned operating businesses include:
Controlled, partially owned subsidiaries include:
From a valuation standpoint, News Corp is at its cheapest level since the spin, trading at basically the value of its REA stake plus net cash and investments. The charts below illustrate the value of News less its REA stake and the components of News Corp’s combined value in recent years.
As REA has appreciated, it has become a significantly larger portion of the overall value embedded within News Corp. As a result, at present the value of the News’s stake in REA stake plus its net cash/investments is approximately equal to its public market cap, attributing essentially no value to its core operating businesses (which still generate ~$500mm in EBITDA) or its Move, FoxTel, or real estate assets.
An illustrative sum-of-the-parts for News Corp is below. The base case is intended to provide a conservative valuation of the assets (in particular valuing Dow Jones and Move at dramatic discounts to public peers and transactions). While we don’t necessarily expect near-term divestitures of assets like Dow Jones or Move, the Private Market Value case illustrates the significant incremental upside optionality should any of these assets be sold or trade close to peer levels. With News Corp currently trading close to $13 versus a base case value ~$22 and a private market value of ~$27, there is significant upside in either scenario.
While some of the businesses certainly face challenges, there are few opportunities in today’s markets to purchase assets at ~50 cents on the dollar (or even less vs. private market values).
While we discuss below why a catalyst appears more likely, the valuation also appears overly penalized in the context of typical holding company discounts – trading at a historically wide discount versus its own history and versus typical holdco discounts.
Recent Management Commentary and Actions:
At the same time News Corp valuation is at its lowest since the spin, we think there has been a recent positive transformation in management commentary and action, and, as a result, catalysts for realizing value have become more probable and near-term. In particular, management has taken several steps recently that we think mark a change in approach to one more focused on realizing shareholder value.
In June 2019, News Corp announced a strategic review to divest the News America Marketing business. CEO Robert Thompson also implied the decision was part of a broader effort in comments on the company’s Q4 2019 call:
“We are also acutely focused on simplifying the structure of the company and making clear the full value of the sum of our parts.”
“…more broadly, we understand when it comes to the News Corp., that this is complex, it's not properly valued. And so we have begun a process of simplification that will be ongoing. The first, most tangible sign of that is the sale process at NAM.”
The commentary about the company’s renewed focus on shareholder value was also emphasized at recent investor conferences – for example CFO Susan Panuccio commented at the BAML conference:
"But the reality is, I guess, over the course of the last couple of years, we've been trading at a significant discount to the sum of the parts, we are aware of that within the company and also the Board, we talk about that. And anything that we can do that can simplify the structure of the company and even the operations of the company as well it's not just necessarily a structural M&A thing. It can also be from an operational efficiency perspective, I think, would be welcome by the markets and by the investment community and help shine a value light on some of the assets that we have across the group."
Both the strategic review and language mark a significant departure from the past, when the company was much more tight-lipped in addressing its languishing share price. Interestingly, Thomson also purchased $1 million worth of shares in August 2018 at $14.13, a premium to the current price at a time when REA was ~20% lower than where it trades today.
Finally, the recent sale of the majority of assets at News Corp’s sister company Fox to Disney and Comcast is another important datapoint. While Murdoch often has the reputation of never divesting assets and stranding value from shareholders, in reality (and despite long periods of inactivity between them) he’s actually undertaken very significant monetization or separation transactions over time for a variety of reasons (legal, succession planning, strategic, etc.). In this case, the Fox asset sale also has implications for News, and potentially sets up the companies to recombine some of their assets (more below).
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