FOXA - Twenty-First Century Fox Inc

[Foreign Tuffett]

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.

This article from last year covers the competition fairly well:

https://www.hollywoodreporter.com/news/fox-news-hasnt-ever-faced-a-real-conservative-tv-rival-will-change-1250427

That's a good point about the REA Group investment.

Yes, the sports gambling investments sector investments have performed well so far and there is definitely significant latent value in the optionality Fox has. A few months ago MoffettNathanson valued this optionality at  ~$2 billion.

More broadly, Fox has a variety of valuable non-core type assets: huge tax shield, ~50 acre 'Fox Lot' in LA, 4 million shares of Flutter stock, received $490 million in August from Disney to finalize tax arrangement from 21st Century transaction, closed on Tubi for $440 million in late March so haven't seen much revenue contribution in financials yet.

[fareastwarriors]

What about Sinclair?

[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.

This article from last year covers the competition fairly well:

https://www.hollywoodreporter.com/news/fox-news-hasnt-ever-faced-a-real-conservative-tv-rival-will-change-1250427

That's a good point about the REA Group investment.

Yes, the sports gambling investments sector investments have performed well so far and there is definitely significant latent value in the optionality Fox has. A few months ago MoffettNathanson valued this optionality at  ~$2 billion.

More broadly, Fox has a variety of valuable non-core type assets: huge tax shield, ~50 acre 'Fox Lot' in LA, 4 million shares of Flutter stock, received $490 million in August from Disney to finalize tax arrangement from 21st Century transaction, closed on Tubi for $440 million in late March so haven't seen much revenue contribution in financials yet.

Great, thanks for sharing the article. The First (Bill O'Reilly) looks like it's coming for them, but time will tell..

If you back out the Fox Lot ($1.5B at least due to iconic/specialized nature) and Flutter shares ($670M), you're paying $15 Billion for roughly $2-2.3 Billion in levered free cash flow. The cash tax benefit alone accounts for roughly $5/share and will increase in value if tax rates go up. Lachlan stated that roughly half of FCF will be returned to shareholders, leaving the other half for "growth" acquisitions. If he doesn't completely mess up that other half, I don't see how this stock isn't worth $40-45 today (low double-digit multiple on FCF).

18 years of utter dominance...legendary newsman at the helm with significant skin in the game (20% of outstanding common shares, mainly Class B)...very strong FCF generation...very strong balance sheet...potential upside from gambling investments...this company gets no respect!

It seems like the market is concerned about a number of things:
1) Next year's advertising revenue, which is myopic.
2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."
3) Annoyed with Lachlan/management for refusing to return all free cash to shareholders. John Nallen (COO) mentioned that they have a "bias for growth". The market isn't giving them enough credit for some of the moves they're making in the gambling industry.
4) This is purely speculative, but it's probably harder to pitch this stock in certain investment committee meetings because politics is polarizing. You might not want to be that guy/gal that voices support for a right-wing media outlet.
5) They're not a high-flying tech/WFH stock so they're not in the limelight. God forbid CNBC talks about a competitor.

You're amongst good company with Baupost, RenTech, Tweedy Browne. Baupost was adding to their position in the first two quarters of 2019 at significantly higher prices. In my opinion, the story hasn't really changed since then. If anything, we have more clarity regarding their operations/financials because they've simplified their structure. The company was recently repurchasing at around $34-35, with additional repurchases ($250 Million) likely made this past quarter.

To be sure, there are concerns. But I don't think the concerns are great enough to warrant a mid-single-digit multiple. They've proven strong FCF in the midst of an economic downturn, which should warrant a re-rating.

[KJP]

It seems like the market is concerned about a number of things:
...

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

Which parts of that are wrong?

[spartan]

It seems like the market is concerned about a number of things:
...

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

Which parts of that are wrong?

I'm not saying you're wrong, but I disagree. Here's why:

Assertion: Streaming video on demand and video games are fundamentally better products than linear TV. Therefore, linear TV will not exist.

Although streaming VOD services are rapidly gaining share of entertainment content, I don’t think that’s the end of the world for Fox. I agree that linear is dying, but after the Disney sale, the value of Fox no longer lies in its entertainment content. The horse is the cable companies, not the live news/sports content. The rapid growth of YouTube TV suggests that the cable bundle isn't dead, it just needs another name ("live bundle"?). As for video games, I think news and sports compete for a different demographic. This is not a big threat.

Assertion: Fox News cannot monetize in the same way outside the bundle (DTC)

I would argue that in the long-term, Fox News will be able to monetize whatever value their users ascribe to their content. Has the value of live news/sports decreased? Personally, I don’t think so. Advertising impressions have not budged for both news and sports in the past 2+ decades. People continue to tune in. As terrible as this sounds, Fox stands to benefit from increased polarization and anger. As long as people want to consume Fox News/Sports in one way or another, Fox will be able to monetize them. What they're really selling is the value of their content. The value/quality of sports content is out of their control, but the value/quality of news content is entirely within their control.

Tuning into Ben Shapiro, Joe Rogan, Bill O’Reilly, or some other podcast/show certainly holds value (e.g. Spotify’s deal with Joe), but it is not a perfect substitute. I don’t know how else to put this but watching those guys just isn’t the same. There is a professional sharpness to Fox that, in my opinion, can’t be supplanted. It has unique appeal; in the way it presents news, how it says things half the country is thinking, how it stirs people's emotions and defends half of America. And there is an “officialness” to them that surprisingly hasn’t been mimicked in 18 years and counting. Paul Ryan sits on the board, they regularly have figures from the “establishment right” come on their show, it is a matter of ego for these people to say that they went on Fox News. Newt Gingrich recently went on the Ben Shapiro show and got around 63,000 views. Going on Hannity would get him 3.5 Million views. Even though guys like Ben and Joe are Fox’s competitors, it will be tough for them to build vast live news/sports capabilities. Fox has distinct organizational competencies built from decades of covering news/sports that simply can’t be mimicked with a chequebook. To think that Shari Redstone can somehow pull a rabbit out of her hat would be a stretch.

As for DTC and other online services, I'll use YouTubeTV as an example.. it costs $64.99/month which is around the nationwide average cost of expanded basic cable TV. Subscribers are growing rapidly (currently around 2 Million). Why wouldn't Fox be able to extract value from YouTube TV and the like? The entertainment content is causing bloating in the cable bundle, not the live content. I think people are still willing to pay for that.

Assertion: You can’t make money broadcasting sports because the sports leagues will suck out all economic profit.

I agree that this is possible but not probable. Sports leagues have a small set of customers that are capable of carrying out their broadcasts in a professional manner, i.e. Fox, CBS, NBC. This allows for potential price collusion. Leagues also want to deal with customers that have nationwide distribution; they care about money and reach. Big tech companies are viable competitors in this space, but not everyone can hook up their internet to their TV set yet, and many Americans don't have access to fast internet, etc. In other words, sports leagues have nowhere else to go and will have to deal with the big 3 networks for the foreseeable future. Assuming sports broadcasts are eventually wiped out of the picture for Fox, I don't think they are much less valuable because their news segment still makes the vast majority of FCF.

[Spekulatius]

It seems like the market is concerned about a number of things:
...

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

Which parts of that are wrong?

Yes, I think this is a pretty good outline for the bear case and it is really hard to argue why this is not going to happen. It’s more of a matter of when then if, imo. Quite frankly, I think the generation that is growing up right now will not watch much linear  TV any more.
Fox also has the renewal of the NFL right coming up in 2022, which could prove to be a watershed moment for them. It’s not their biggest cash cow, but according to analysts estimates Fox sports is still 25% of their cash flows, so losing the NFL rights could really hurt.

[spartan]

It seems like the market is concerned about a number of things:
...

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

Which parts of that are wrong?

Yes, I think this is a pretty good outline for the bear case and it is really hard to argue why this is not going to happen. It’s more of a matter of when then if, imo. Quite frankly, I think the generation that is growing up right now will not watch much linear  TV any more.
Fox also has the renewal of the NFL right coming up in 2022, which could prove to be a watershed moment for them. It’s not their biggest cash cow, but according to analysts estimates Fox sports is still 25% of their cash flows, so losing the NFL rights could really hurt.

I just don't think cord cutting is as much of a concern for news in general - see attached. Intellectual dark web guys, like Shapiro, Rogan, Rubin, Gaad Saad pose a threat.. but they're too cerebral for Fox viewers. Fox is more laidback/entertaining and isn't afraid to air a few good looking blondes to reel in the geezers..

[Foreign Tuffett]

Nice to see a thread on COB&F where users are actually engaging with points made by other posters.


I think KJP outlines the bear case really well. Cord cutting is the biggest risk here. Like I mentioned last month, both of FOX's segments are dependent on pay TV subs.


A few points, mostly bullish:

Streaming/Video on demand (VOD) services are clearly better than linear TV for scripted content. However, news and sports content almost demand live viewing. At Fox's big IR day last May management stated that "Over 90% of TV news content is consumed live." This is consistent with common sense, right? No one is watching reruns of Wolf Blitzer or Fox & Friends.
----
One way to think about the company is to divide it into good co/bad co based on whether or not it produces and owns the content it airs. So Fox News and the 17 local TV stations are the good co, and the Fox Network and FS1/FS2 are the bad co.

Fox News, Fox Biz, and the local TV stations produce their own evergreen news content

As KJP points out, the sports leagues have every incentive to capture as much value as possible. Thus, over time, we should expect Fox Network and FS1/FS2 to have low margins. It's also possible that Fox will simply overpay for sports rights (US Open says "hi").

This good co/bad cos situation is complicated by the fact that one of the reasons Fox pays up for sports rights is so that viewers carry over from sports events to local news and other programming like "The Masked Singer (had its Season 3 premiere immediately after the last Super Bowl)
----
I do think FOX has been quietly preparing to possibly launch a Fox News/Fox Biz streaming service some time in the future: Buying Tubi, launching Fox Nation, launching Fox News International, spending $200 million to build a "streaming and technology" hub in Arizona, etc

[KJP]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields). 

EDIT:  Thinking about this a bit more, I suspect there are MVPD subscriber decline curves (along with estimates of how retrans fees will be split over time) that would reconcile the FCF and debt yields of these companies, but I'm too lazy to try to calculate such an implied curve.  Has anyone see any analysis of this? 

[Foreign Tuffett]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields).

Gray and Nexstar appear to own primarily smaller market stations, whereas basically all of FOX's stations are in the largest US cities (14 of the 15 top designated market areas per 10-K).

Someone correct me if I'm wrong here, but I don't think it's possible to parse out the economics of FOX's local stations from the disclosure provided. Management discussed the strong margins of its local news content a bit at the IR Day (page 26 of the transcript).