FOXA - Twenty-First Century Fox Inc

[Spekulatius]

down 3.5% today on Kacie McDonnell? 

 

That doesn't make sense... anyone have any insight here?

 

It’s not Kacie’s fault, the whole media sector went to

[Foreign Tuffett]

Results looks fine to me. Below are my notes from the call:

 

"Fox has established itself as the #1 broadcast network." NFL ratings are high. Friday night WWE Smackdown is off to a strong start. Expect a robust political ad market next year. Sub declines in the traditional MVPD universe have accelerated in recent months, but mostly this is just one distributor (they didn't mention AT&T/DirectTV by name, but that's who they meant). Super Bowl will be streamed/aired in 4K for the first time this season. Fox Business unveiled a new brand refresh ~1 month ago with a new logo and redesigned digital properties. Beginning to integrate Credible Labs' services into Fox Business' digital properties.

 

BOD has authorized a $2B stock buyback. $500M of this will be completed "in the near term." "We believe we are undervalued in respect to our peers and other investment opportunities."

 

TV advertising market remains strong. News ad market is a little weaker than sports and entertainment markets as news competitors haven't held the line on price. Super Bowl ads are selling through well and they are confident that the price per 30 second ad will be the highest of any Super Bowl to date.

[brycepeterson]

Thank you.

[walkie518]

Doesn't FOX have the vote?  Why buy FOXA for a premium when FOX should have it?

[Spekulatius]

Doesn't FOX have the vote?  Why buy FOXA for a premium when FOX should have it?

 

FOXA is a bit more liquid, not that it should matter for any of us, since FOX is plenty liquid. The two used to trade at almost the same price, but recently FOXA has diverged and started to trade at a premium for really no good reason.

[Okonomen]

Can anyone explain to me why the EBITDA-margin in Television is only around 8%? Is it because sports rights are incurred here and in such case, what are the EBITDA-margins on the TV-stations? Afaik sports rights costs are incurred in the cable segment, right? So what is putting so much pressure on Television EBITDA?

[Spekulatius]

Can anyone explain to me why the EBITDA-margin in Television is only around 8%? Is it because sports rights are incurred here and in such case, what are the EBITDA-margins on the TV-stations? Afaik sports rights costs are incurred in the cable segment, right? So what is putting so much pressure on Television EBITDA?

 

According to the Q3 report (Page 17) The EBITDA from Television is $251M/$1356M or ~18.5%. It seems a somewhat low number, but it’s much higher than 8%.

[Okonomen]

Ah yeah was looking at the last couple of fiscal years. Not the most recent Q. Maybe theres some seasonality ? Otherwise i dont understand the huge improvement. Maybe something to do with entertainment?

[KJP]

Can anyone explain to me why the EBITDA-margin in Television is only around 8%? Is it because sports rights are incurred here and in such case, what are the EBITDA-margins on the TV-stations? Afaik sports rights costs are incurred in the cable segment, right? So what is putting so much pressure on Television EBITDA?

 

Sports rights are incurred primarily in the Television segment (Fox Network), not the Cable Segment (primarily Fox News).  See, e.g., this description of the Television segment results in the Q4 2019 earnings release:

 

Television reported full year segment revenues of $5.98 billion, an increase of $873 million or 17% from the amount in the prior year.      Advertising  revenues  increased  $394  million  or  11%,  primarily  due  to  the addition of Thursday  Night  Football and the broadcast of one additional NFL Divisional Playoff game, record cyclical political advertising revenues at the FOX Television Stations and additional FIFA World Cup matches in the current year.    The increase in advertising revenues was partially offset by the broadcast of two fewer MLB World Series games in the current year compared with the prior year.  Affiliate revenues increased $326 million or 24% led by an increase in programming fees from third-party FOX affiliates.  Other revenues increased $153 million or 62%, primarily due to higher digital content licensing revenues.

 

That is why Cable earnings are so much higher than Television earnings.  To be sure, Fox does show sports on some of its other cable networks, but those sports rights (NASCAR, college sports, etc.) do not compare to the rights fees Fox TV pays to the NFL, which airs only on Fox Network, not any of the Fox sports cable channels.

[Okonomen]

A back-of-the-envelope attempt to value Fox could be this:

 

Normalized EPS: ~3 USD (earnings will be somewhat lumpy due to political elections, sports events and renegotiations (affiliates and sports rights)

Multiple: 15x (Peers trade lower but Fox has unique assets, significant growth opportunities and a strong moat. S&P trades significantly higher and I think Fox boasts much more quality than peers both on biz model and on balance sheet strength)

Non-core assets ex cash: 7 USD/share (roku stake, STG stake, studio lot and the tax asset. The tax asset alone I value at around 4 USD/share)

Excess cash: 3 USD/share

 

Total value per share: 55 USD (~64% upside)

 

I don't really have an idea of how much earnings flow thru the P/L from non-core assets, but I think it's minor?

 

Have I forgotten something here? EPS considers interest expense so I don't think I forget anything regarding debt. I think it would be double counting to assume share count reduction from the recent buyback announcement

[Okonomen]

https://www.valueinvestorsclub.com/idea/NEWS_CORP/5014457469

 

Dont know what to think about a fox/news corp merger. I have also read statements by rupert murdoch about this being his long term plan, but for me as fox shareholder it kinda complicates things that murdochs owns big states in both... will they be disciplined on price? Hope so

 

From the article on VIC:

 

“Finally, following the Fox divestitures, we think the probability has significantly increased that News Corp and the remaining Fox assets are recombined.  Murdoch-owned publications have published sourced articles stating that is Rupert’s eventual intention (e.g. https://www.wsj.com/articles/rupert-murdoch-says-disney-deal-is-a-pivot-not-a-retreat-1513280513) and Rupert himself confirmed that intent is his comments (although the tax structure of the Disney deal means that he has had to be fairly oblique thus far).

 

Recombining the two businesses makes logical sense, as you have two companies in adjacent industries that share a headquarters building and are controlled by the same shareholder.  News and Fox have ~$500 million of combined corporate costs so the synergies from any deal would be meaningful. Additionally, many of the reasons originally put forth for the split – separating growthier businesses from more mature ones and cleaving off any potential liability stemming from the 2011 UK newspaper matter – are no longer valid now that time has passed and Fox has sold its studio business to Disney.

 

A recombination would be tax free two years after the Fox/Disney deal closed, which would be March 2021.  We think it’s likely that any recombination will take the form of New Fox tendering for News Corp at a premium and we believe much of News Corp’s renewed focus on boosting its share price may be in anticipation of that deal.  Such a recombination would also likely include a separation of other assets at News, both as the nature/geography of the assets differs significantly (e.g., REA/Move) and potentially as a part of succession planning.”

[RadMan24]

A back-of-the-envelope attempt to value Fox could be this:

 

Normalized EPS: ~3 USD (earnings will be somewhat lumpy due to political elections, sports events and renegotiations (affiliates and sports rights)

Multiple: 15x (Peers trade lower but Fox has unique assets, significant growth opportunities and a strong moat. S&P trades significantly higher and I think Fox boasts much more quality than peers both on biz model and on balance sheet strength)

Non-core assets ex cash: 7 USD/share (roku stake, STG stake, studio lot and the tax asset. The tax asset alone I value at around 4 USD/share)

Excess cash: 3 USD/share

 

Total value per share: 55 USD (~64% upside)

 

I don't really have an idea of how much earnings flow thru the P/L from non-core assets, but I think it's minor?

 

Have I forgotten something here? EPS considers interest expense so I don't think I forget anything regarding debt. I think it would be double counting to assume share count reduction from the recent buyback announcement

 

Durable cash flows during recession. Cash is always king in recessions and those who spit it off are often re=evaluated.

[Spekulatius]

https://www.valueinvestorsclub.com/idea/NEWS_CORP/5014457469

 

Dont know what to think about a fox/news corp merger. I have also read statements by rupert murdoch about this being his long term plan, but for me as fox shareholder it kinda complicates things that murdochs owns big states in both... will they be disciplined on price? Hope so

 

From the article on VIC:

 

“Finally, following the Fox divestitures, we think the probability has significantly increased that News Corp and the remaining Fox assets are recombined.  Murdoch-owned publications have published sourced articles stating that is Rupert’s eventual intention (e.g. https://www.wsj.com/articles/rupert-murdoch-says-disney-deal-is-a-pivot-not-a-retreat-1513280513) and Rupert himself confirmed that intent is his comments (although the tax structure of the Disney deal means that he has had to be fairly oblique thus far).

 

Recombining the two businesses makes logical sense, as you have two companies in adjacent industries that share a headquarters building and are controlled by the same shareholder.  News and Fox have ~$500 million of combined corporate costs so the synergies from any deal would be meaningful. Additionally, many of the reasons originally put forth for the split – separating growthier businesses from more mature ones and cleaving off any potential liability stemming from the 2011 UK newspaper matter – are no longer valid now that time has passed and Fox has sold its studio business to Disney.

 

A recombination would be tax free two years after the Fox/Disney deal closed, which would be March 2021.  We think it’s likely that any recombination will take the form of New Fox tendering for News Corp at a premium and we believe much of News Corp’s renewed focus on boosting its share price may be in anticipation of that deal.  Such a recombination would also likely include a separation of other assets at News, both as the nature/geography of the assets differs significantly (e.g., REA/Move) and potentially as a part of succession planning.”

 

First time I look at NEWS since 2013 or thereabouts. It’s a messy asset with uncertain earnings power. If Murdoch merges this with Fox as is, it won’t create much value and shift the discount to FOX.

 

I also question the synergies. The fact that both companies occupy the same building doesn’t mean much. Isn’t this mostly WSJ stuff anyways? If so, it couldn’t be rescued when the companies were merged,

 

I certainly wouldn’t like the deal as a FOX shareholder and I don’t think the bus8ds really fit together. Before anything would happen, NEWS would need to separate off the real estate business, sell, the book publisher and get rid off most of most of the  newspaper assets, imo. I can see that the WSJ might fit into FOX at some point , maybe News could just sell thet piece off, if it makes sense for both entities?

[Okonomen]

Does FOX still own the rights to all their series such as american dad, simpsons, family guy etc? Isn't this part of the entertainment revenue? Or dis DIS also get these content rights?

[JRM]

Does FOX still own the rights to all their series such as american dad, simpsons, family guy etc? Isn't this part of the entertainment revenue? Or dis DIS also get these content rights?

 

Disney owns Family Guy and Simpsons now, I would assume American Dad also. 

[Okonomen]

Does FOX still own the rights to all their series such as american dad, simpsons, family guy etc? Isn't this part of the entertainment revenue? Or dis DIS also get these content rights?

 

Disney owns Family Guy and Simpsons now, I would assume American Dad also.

 

In that case I don't understand why Fox mgmt then mentions all these cartoons as an opportunity in their entertainment segment?

 

From page 8 in the AR19: "FOX Entertainment. FOX Entertainment delivers high-quality scripted, non-scripted and live content. During the 2018-2019 broadcast season, FOX Entertainment primetime programming featured such series as 9-1-1, Bob’s Burgers, Empire, Family Guy, The Orville, The Resident, The Simpsons and Star; unscripted series such as The Masked Singer, Hell’s Kitchen, MasterChef Junior and 24 Hours to Hell and Back; and event specials such as a live production of Rent."

[Spekulatius]

Does FOX still own the rights to all their series such as american dad, simpsons, family guy etc? Isn't this part of the entertainment revenue? Or dis DIS also get these content rights?

 

Disney owns Family Guy and Simpsons now, I would assume American Dad also.

 

In that case I don't understand why Fox mgmt then mentions all these cartoons as an opportunity in their entertainment segment?

 

From page 8 in the AR19: "FOX Entertainment. FOX Entertainment delivers high-quality scripted, non-scripted and live content. During the 2018-2019 broadcast season, FOX Entertainment primetime programming featured such series as 9-1-1, Bob’s Burgers, Empire, Family Guy, The Orville, The Resident, The Simpsons and Star; unscripted series such as The Masked Singer, Hell’s Kitchen, MasterChef Junior and 24 Hours to Hell and Back; and event specials such as a live production of Rent."

 

The cartoons that 21th century Fox used to produce still run in FOX channels, but the IP went to Disney with purchase of the studios. Fox now owns their own animation studio (Bento box) and intends to produce their own content going forward.

[Okonomen]

Does FOX still own the rights to all their series such as american dad, simpsons, family guy etc? Isn't this part of the entertainment revenue? Or dis DIS also get these content rights?

 

Disney owns Family Guy and Simpsons now, I would assume American Dad also.

 

In that case I don't understand why Fox mgmt then mentions all these cartoons as an opportunity in their entertainment segment?

 

From page 8 in the AR19: "FOX Entertainment. FOX Entertainment delivers high-quality scripted, non-scripted and live content. During the 2018-2019 broadcast season, FOX Entertainment primetime programming featured such series as 9-1-1, Bob’s Burgers, Empire, Family Guy, The Orville, The Resident, The Simpsons and Star; unscripted series such as The Masked Singer, Hell’s Kitchen, MasterChef Junior and 24 Hours to Hell and Back; and event specials such as a live production of Rent."

 

The cartoons that 21th century Fox used to produce still run in FOX channels, but the IP went to Disney with purchase of the studios. Fox now owns their own animation studio (Bento box) and intends to produce their own content going forward.

 

Thanks for the clarification. Can you provide a source to this information? Does that mean that fox don’t earn a dime on their cartoons going forward?

[Spekulatius]

Does FOX still own the rights to all their series such as american dad, simpsons, family guy etc? Isn't this part of the entertainment revenue? Or dis DIS also get these content rights?

 

Disney owns Family Guy and Simpsons now, I would assume American Dad also.

 

In that case I don't understand why Fox mgmt then mentions all these cartoons as an opportunity in their entertainment segment?

 

From page 8 in the AR19: "FOX Entertainment. FOX Entertainment delivers high-quality scripted, non-scripted and live content. During the 2018-2019 broadcast season, FOX Entertainment primetime programming featured such series as 9-1-1, Bob’s Burgers, Empire, Family Guy, The Orville, The Resident, The Simpsons and Star; unscripted series such as The Masked Singer, Hell’s Kitchen, MasterChef Junior and 24 Hours to Hell and Back; and event specials such as a live production of Rent."

 

The cartoons that 21th century Fox used to produce still run in FOX channels, but the IP went to Disney with purchase of the studios. Fox now owns their own animation studio (Bento box) and intends to produce their own content going forward.

 

Thanks for the clarification. Can you provide a source to this information? Does that mean that fox don’t earn a dime on their cartoons going forward?

 

Disney mentioned owning the Simpsons in their IR presentation following the merger with 21th Century Fox.

 

Secondary source:

The Fox TV network, in particular, is going to suffer somewhat for losing access to the Fox TV studio, which produced most of the shows that actually air on it, but it has also locked down The Simpsons and its other animated comedies for the next one to two years. (It can also continue to buy programming from any studio it wants, including Disney/Fox. That’s just a less lucrative option.

 

https://www.vox.com/culture/2019/3/20/18273477/disney-fox-merger-deal-details-marvel-x-men

 

[bizaro86]

Disney owns the IP for all the fox studios productions. The Fox network pays a fee to air episodes of those shows, and sells advertising during those timeslots.

 

The entire run of the Simpsons is available on Disney + for viewing.

[Okonomen]

Strange that fox is so much hit by corona. Is it because investors expect companies to pull back on advertising spending? One could also argue that in times where people are more at home and safe they watch more tv :D

[Spekulatius]

Strange that fox is so much hit by corona. Is it because investors expect companies to pull back on advertising spending? One could also argue that in times where people are more at home and safe they watch more tv :D

 

Same thought here. I sold most of mine above $36 and now started to buy back into my position again. It seems like a good bet when people stay at home more and watch the epidemic unfold. We also have an election year which is good for poltical advertisement. I also think they have the best durability of all the networks, imo.

[Okonomen]

Regaridng all those sports events being cancelled etc I got a few thoughts:

 

1) CBS, FOX, ESPN etc has the rights to broadcast these events, but in this case where an exogen factor forces nation-wide cancellations, isn't there some sort of insurance/reimbursement deal in place? Or is it just bad luck?

 

2) Why don't they just play the games without live audience? I.e. playing the games and only showing it on TV? This would also be more fair to the companies like CBS, Fox etc who paid billions in sports rights..

 

It just sounds a little unfair if they have paid billions of USD and get nothing out of it?

[Foreign Tuffett]

Revisited this idea recently. One aspect that I can't get comfortable with is that MVPDs must pay Big Four (ABC, CBS, NBC, Fox) stations/their local affiliates to include them in their sub packages.

 

https://en.wikipedia.org/wiki/Retransmission_consent

 

So while it's obvious that Fox's "Cable Network" segment is dependent on pay TV subs, what is less obvious is that the "Television" segment is dependent on them too. As folks drop pay TV they can buy cheap digital antennas to freely access the local channels that they were paying for.

 

Really makes me wonder if this part of the business is a melting ice cube. Margins are already low.

[spartan]

Why hasn't anyone been able to successfully compete with Fox for almost two decades? Can anyone list examples of failed competitors?

 

Also, while I'm not fully defending Lachlan, his investment in REA Group has been impressive. In 2004, he paid $2.25 Million cash and $8.5 Million in contra advertising for a 44% stake, with an option to buy more shares in the future. He ended up accumulating 61% of the company and used his "megaphone" to push REA's products. News Corp's stake in REA Group is now worth around $9.6 Billion. I'm assuming he's looking for other ways to do this sort of thing. The Credible/Stars Group acquisitions were probably made with similar logic.

 

The 10 year option to buy 18.5% of FanDuel seems like an asymmetric payout feature of this stock.. the option states that the stake can be purchased for their 2021 market value. Currently, FanDuel and DraftKings run a duopoly in sports betting.