- News Corp. is a value play, based on sum-of-the-parts valuation.
- News Corp.'s recently acquired Storyful could become a very valuable media property.
- News Corp.'s strong balance sheet gives the company flexibility, and could allow the company to go private.
Since the spin-off of 21st Century Fox (NASDAQ:FOX) in 2013, relatively little attention has been paid to the new News Corp. (NASDAQ:NWSA). Due to this, I believe some investors have overlooked the value proposition that is NWSA.
To begin with, NWSA has over $3 billion, or $5.43 per share of cash, and no debt. NWSA owns a 61.6% controlling interest in REA Group Limited, Australia's largest residential property market website. REA Group is a publicly traded company with a market cap of $5.7 billion. Based on this, NWSA's stake is worth just over $3.5 billion. NWSA also owns a 50% stake in Foxtel, the largest pay TV provider in Australia. In a complicated 2012 deal, NWSA paid about $2 billion to increase its stake in Foxtel from 25% to 50% and purchase the remaining 50% interest of Fox Sports Australia that it did not already own. Based on these numbers, I think it is fair to say that the combined value of NWSA's Foxtel and Fox Sports Australia stakes is at least $4 billion, if not more. The combined value of NWSA's cash, the REA Group stake, the Foxtel stake, and Fox Sports Australia is at least $10.5 billion. NWSA currently has a market cap of just under $10 billion.
Significant More Difficult Assets To Value
In addition to the assets already mentioned, NWSA has a number of other significant holdings, including Dow Jones Media and HarperCollins. NWSA purchased Dow Jones Media in 2007 for $5.6 billion. The business has struggled somewhat over the past few years. While NWSA does not break out Dow Jones results on their own, one estimate claims that Dow Jones is responsible for 27% of NWSA EBITDA. For 2014, NWSA reported EBITDA of $770 million. Using a 27% figure, Dow Jones would have generated $207.9 million of EBITDA. Based on enterprise value to EBITDA valuations of a number of comparable companies, such as The New York Times, Gannett, and Time Inc., Dow Jones is worth 8x EBITDA, or $1.66 billion. In my view, this estimate seems low given the $5.6 billion price tag paid for Dow Jones in 2007. An alternative valuation method is to consider the share performance of a comparable company since the Dow Jones deal closed August 1, 2007. Since August 1, 2007, shares of The New York Times (NYSE:NYT) are down 46%, while shares of Gannett are down 32.3%. Based on these numbers, it is fair to assume that Dow Jones is worth roughly 40% less than NWSA paid for the company in 2007. This method results in a valuation of $3.36 billion for Dow Jones.
HarperCollins is the leading property in NWSA's book publishing division. For fiscal 2014, this division delivered $1.37 billion in revenue and EBITDA of $197 million. Comparably, in 2013, the segment reported revenue of $1.28 billion and EBITDA of $142 million. Based on the valuations of peers such as John Wiley & Sons, I believe NWSA's publishing unit is worth at least 10x EBITDA, or $1.9 billion.
Insignificant More Difficult Assets To Value
In addition to the above mentioned assets, NWSA also has a small education business, which has annual revenue of $40 million. NWSA also owns many smaller print publications, such as New York Post, and publications included in the News UK and News Corp. Australia divisions. While these publications are currently cash flow-positive, the future for traditional print media is certainly in question, and thus, it is difficult to put a fair value on these properties. However, based on the argument I have already made based on more significant assets, I do not believe these assets are essential to see the value in NWSA. Rather, these assets are something of a bonus.
In December 2013, NWSA announced that it was acquiring Storyful, the world's first social news agency, for $25 million. In April, Storyful announced a partnership with Facebook to launch a newswire service for content produced by social media users. I believe Storyful has a lot of potential going forward. While the business is currently too small to enter into the valuation story for NWSA, it is something to keep an eye on as local news continues to become more social. In addition to liking Storyful itself, I believe NWSA's deal to acquire Storyful shows that the company will take a measured conservative approach to making acquisition to enhance and diversify its business.
Strong Balance Sheet And Possible LBO
As previously mentioned, NWSA has a significant cash position and no debt. This means that NWSA has a lot of flexibility. The company could make a number of acquisitions to help boost its business. NWSA could also engage in a massive share repurchase program to help boost its share price. Another, highly unlikely but possible alternative is that Rupert Murdoch engages in a deal to take NWSA private. Currently, Murdoch owns 39% of the company's class B shares and a 14% interest in all of News Corp. In late 2013, Southeastern Management took a 12% stake in News Corp. Southeastern teamed up with Carl Icahn in a bid to take Dell private in 2013. While Dell ultimately was taken private by Michael Dell and Silver Lake, the deal showed that Southeastern could be a part of an LBO. The combined value of Southeastern & Murdoch's stake in News Corp is 26%, worth about $2.6 billion. After subtracting NWSA's cash, the company has an enterprise value of just $6.6 billion. To get a deal done, Murdoch would likely have to offer close to $8 billion. Assuming Southeastern as a partner, to complete an LBO, Murdoch would need to raise an additional $5.4 billion. Given NWSA's strong balance sheet, the company could easily take on debt of $2-3 billion. This would leave about $2 billion that would be needed to deal. Murdoch could sell some of his Fox shares or engage another buyout partner. Alternatively, Murdoch could simply decide to sell some of NWSA's stake in REA Group.
Why News Corp. Trades At A Discounted Valuation
I believe NWSA is currently trading at a discount because the stock lacks any meaningful catalyst over the short term. In particular, NWSA has not used its massive cash hoard to buy back shares or to initiate a meaningful dividend. NWSA has said it intends to use its cash to make smart acquisitions. Furthermore, NWSA does not have plans to monetize its Foxtel or REA Group stake anytime soon. While I have suggested that a Murdoch led LBO is possible, I do not view it as particularly likely. Due to the lack of short-term catalysts, NWSA investors will need to hold shares for the long term to realize value. Eventually, NWSA will make moves to bring out shareholder value. These moves could include smart acquisitions with its cash, a sale of either Foxtel or REA Group, or a large stock buyback program.
NWSA is a strong buy, because the company is currently undervalued. A strong case can be made that NWSA's cash, the REA Group stake, the Foxtel stake, and Fox Sports Australia are currently worth more than all of NWSA. NWSA also has significant value in its publishing business, which earned nearly $200 million in 2014, in Dow Jones Media Group, which was purchased for $5.6 billion in 2007, and in other properties such as News UK and the New York Post. Due to the difference in the company's fair value and market value, I believe NWSA is also a possible LBO target. Due to Rupert Murdoch's controlling interest, he would need to be involved in the deal. Southeastern seems like a likely partner if Murdoch decides to pursue an LBO. Based on the sum-of-the-parts valuation I did in this article, I believe NWSA is worth a minimum of $15.7 billion, or 58% more than the current market value.