January 09, 2014 - 11:39am EST by
2014 2015
Price: 32.59 EPS $3.03 $0.00
Shares Out. (in M): 2,309 P/E 10.8x 0.0x
Market Cap (in $M): 75,250 P/FCF 0.0x 0.0x
Net Debt (in $M): 10,500 EBIT 5,982 0
TEV ($): 85,750 TEV/EBIT 14.3x 0.0x

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Long FOX and short FOXA.


I will keep this short and sweet.  First, the situation is simple.  And second, the discount is the largest it has ever been.  I would be surprised if it remains at these levels for more than a few days.  FOXA is easy to borrow. And FOX is pretty liquid.


Despite being a superior security, FOX is trading at a 3 to 4% discount to FOXA. Both securities have equal economics: same dividend, same priority in liquidation, etc.  However, FOX has voting rights, while FOXA has none.  Obviously, the controlling shareholder owns FOX.  And he seems to care about the stock price (and likely his own).


The company announced this morning that it will seek to remove its listing from the Australian stock exchange.  Going forward, its shares will only trade on the Nasdaq.  Clearly, this is a non-fundamental event.


Historically, the voting security has traded at a premium, averaging 10% and reaching a high of 22% in 2010.  This is despite lower liquidity.  It must be said, however, that FOX is pretty liquid.  About one million shares trade on an average per day.  The volume for FOXA is about 5x that of FOX.


Before 2010, the voting only traded at a discount (of 1%) to the non-voting for a very brief period of time during the market dislocation of 2008-2009.


More recently, as far as I can tell, two events eliminated the premium of the voting.  The first was the phone-hacking scandal in theUKin 2011.  This was followed shortly by the initiation of a large share repurchase program, which seems to have been put in place to arrest the decline of the stock.  (This suggests to me that the controlling shareholder cares about the stock price.) Naturally, the share repurchase program has focused on the non-voting.


Since the repurchase program seems to be ongoing, in my view this is the main impediment to the voting trading at a premium.  However, there is little precedent supporting a relatively large discount.


In April of 2012, with most of the trading premium eliminated, the company suspended 50% of the voting rights of the voting stock held by non-U.S. citizens to maintain compliance with U.S. law which states that no broadcast station licensee may be owned by a corporation if more than 25% of that corporation's stock was owned or voted by Non-U.S. Stockholders.  Simultaneously, the controlling shareholder entered into an agreement with the Company to limit their voting rights during the voting rights suspension period.


This brings me to the catalyst.  Eliminating the foreign listing should reduce or potentially avoid the need to suspend some of the voting rights.  I don’t think it is too far-fetched to surmise that reinstating the voting rights is the main motivation behind discontinuing the foreign listing. Although this is just one of the reasons mentioned in the press release, it is clearly spelled out.  While I can not call this a hard catalyst, especially because the share repurchase will most likely continue, in my opinion the controlling shareholder is probably not happy with the discount.


The trading dynamics seem to provide some confirmation with respect to decreasing foreign ownership.  The drop in the stock price, and in particular of the voting, points to foreign holders liquidating.  This has created a temporary inefficiency that not only goes against the fundamentals but also contrary to the very successful controlling shareholder.  Thus, the risk-reward is attractive.  It is hard to envision a scenario where you permanently lose money.  And you get paid a little while you wait…


I would more than welcome the opportunity to hear the case for the opposite trade.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Soft catalyst: reinstatement of full voting rights.
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