News Corp. split into two companies on July 1 2014. Most of the media and entertainment assets were put into the company Twenty-first Century Fox Inc (FOX). The newspaper assets and Harper Collins along with some local Australian assets were stuck together with some cash into News Corporation (NWSA). Chairman Rupert Murdoch has a track record of creating shareholder value and the situation reminds me of last year's spin-off Liberty Media/Starz where John Malone was involved.
Because the 50% stake in Foxtel isn't consolidated in the results, this stock is undervalued.
1. More than a Newspaper Business
The new company is much more than just newspaper assets. The business that gets the headlines is Fox but NWSA has several interesting media assets itself. News Corp. has stakes in multiple media businesses based in Australia that have juicy growth prospects.
The company has a 61% stake in REA Group, a big player in the online real estate classifieds market in Australia. The business is expanding into Hong Kong and Italy.
In addition NWSA owns 50% of Foxtel, a 50/50 JV with Telstra Corp Ltd (OTCPK:TTRAF), which is now the clear dominant pay TV distributor in Australia. It offers both satellite and cable to customers. Foxtel is a very interesting asset to NWSA that is not consolidated in the results. Meanwhile this is a fast growing company that just made a deal with the BBC to steal content away from a competitor. That may give them another boost in June 2014. To quickly illustrate some of the potential there, I'll quote ABC.net writer Renai LeMay:
Instead, in the near term, I'd say Foxtel's management will very likely be spending much more time on a more familiar practice: Counting the piles of cash money they generate every year from the company's very lucrative, almost monopolistic business model, and doing advance planning on what content they're going to pay to get an exclusive deal on next year. The latest series of True Blood, anyone? Only on Foxtel.
In addition the Financial Review noted the following about Telstra's 50% ownership of Foxtel, important in regard to future growth prospects:
Telstra CEO David Thodey has cleared the way for Foxtel to begin selling "triple play" bundles, and talked up the carrier's ability to export its fast growing information services business into Asia.
Mr Thodey told institutional investors and analysts that increasing Foxtel's penetration rate to about 50 per cent of households, from about 30 per cent currently, was a "very important part" of Telstra's media strategy
Finally, News Corp. also owns 100% of Fox Sports Australia, which is the dominant cable sports channel in the country. Even though Australia has only 23 million inhabitants which puts a cap on revenue, its also a market size that is easier to defend. Still Sports TV is an attractive business because it relies on licensing and is less prone to piracy because people want to watch it live.
The company appears expensive when judged with traditional value metrics like P/E and won't easily show up on screens run by value investors. At the same time, the low growth old-economy newspaper business is not attractive to growth investors.
2. Chairman Rupert Murdoch
Chairman Rupert Murdoch is reigning supreme over NWSA given the voting power he holds. Love him or hate him: Murdoch started with his family's small newspaper firm and built one of the largest global media conglomerates in the world.
This spin-off brings Murdoch back to his Australian roots. Murdoch's past impressive successes include starting the Fox broadcast network and Fox News Channel in the United States. Especially the way Murdoch maneuvered Fox onto the scene, defying all critics, who said he couldn't do it, was brilliant. One of his epic misses has been buying Myspace. Although given the success of Facebook (FB), you can also make the argument it was a good bet that didn't work out. One of the better reads on the controversial Mogul is "Murdoch" by William Shawcross.
In my opinion Rupert Murdoch's track record of success and his ownership stake in the business are a strong positive.
After the spin-off investors received 4 shares of FOX and 1 share of NWSA. The larger and more sexy media company FOX is attracting most of the attention.
Meanwhile the NWSA Foxtel assets have not been consolidated on the balance sheet of NWSA. The company also holds $4 in cash on the balance sheet.
As a result the company appears rather expensive when judged with traditional value metrics (P/E of 19) and won't show up on screens run by value investors. At the same time, the low growth old-economy newspaper business is not attractive to growth investors.
- staying off value investors screens
- unattractive business to growth investors
- chairman/insiders with big equity stake
- unconsolidated attractive growth asset
This is how this attractive spin-off managed to stay under the radar.