Obviously, Twenty-First Century Fox (FOXA/FOX) is currently getting a lot of attention for its bid to acquire the rest of Sky PLC. One aspect of the company that has gotten no attention is the inexplicable relationship between the prices of its non-voting Class A shares [FOXA] and its voting Class B shares [FOX]. The voting shares are currently trading at a DISCOUNT to the non-voting shares!
This is a unique situation in the market today and is counter to basic logic. It represents a very attractive opportunity for not only shorter-term investors, but also those with longer horizons who can swap into a more attractive share class at a discount while realizing tax losses. Here are the key considerations:
1. Clearly, in cases where there are multiple classes of stock, those with voting rights should trade at a premium to those with no voting rights. And this is indeed the case throughout the market. In fact, with the exception of FOX/FOXA, there is no other example of a company with a meaningful market cap where this is not the case. In the case of FOX/FOXA, the voting shares are trading at a DISCOUNT to the non-voting shares. As of Dec 23, FOX is trading at 27.70 and FOXA is at 28.38 - a 2.5% DISCOUNT FOR THE VOTING SHARES!
2. This is clearly an anomaly in the market. For companies ranging from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) to Under Armour (NYSE:UA) (NYSE:UAA), the voting shares trade at a premium to the non-voting shares - in some cases, a very significant premium. Some examples among Fox's media peers include:
- Discovery Communications, Inc.'s DISCA (voting) at $28.00 vs. DISCK (non-voting) at $27.30 = 3% premium.
- Viacom's VIA (voting) at $38.85 vs. VIAB (non-voting) at $35.15 = 11% premium.
- News Corp.'s NWS (voting) at $12.05 vs. NWSA (non-voting) at $11.73 = 3% premium.
The last example (NWS vs. NWSA) is perhaps the most interesting, given that FOX and NWS were once one company. In the case of NWS/NWSA, there is a logical relationship between the two share classes. In the case of FOX/FOXA, there is an ILLOGICAL relationship.
3. Sometimes, disparities like this in the market can result from illiquidity. That is not the case here. FOX (voting shares) has traded an average of 4 million shares on a daily basis over the last 90 days. While that is less than FOXA's average of 12 million shares, it is still very liquid.
4. It is highly unlikely that this ANOMALY will persist for long. Illogical disparities like this generally disappear over time. In the case of FOX/FOXA, there is also a very clear and imminent CATALYST for near-term reversion to a more logical relationship - the Sky acquisition. Fox has been very active repurchasing its own stock. Since the start of 2014, Fox has repurchased $15.1 billion of stock. The entire repurchase has been in the form of non-voting Class A shares.
This makes sense, since for most of its trading history, the non-voting Class A shares have traded at a discount to the Class B voting shares. Because the Sky acquisition will entail a significant addition of debt to Fox's balance sheet, the company will cease repurchasing stock. This will take away a historically consistent buyer of Class A shares. Given the amount of debt that Fox will be taking on to purchase the rest of Sky, it is possible that Fox may also eventually issue new Class A stock to reduce its post-acquisition leverage. This would put further pressure on the non-voting Class A shares.
5. The opportunity for shorter-term investors is to short the Class A shares and go long the Class B shares. There is plenty of borrow and volume in the Class A shares, so this trade can be put on very easily. Class B shares are also very, very liquid.
6. There is also a no-brainer opportunity for longer-term investors that currently own the non-voting Class A shares. Given that FOXA is currently trading near a 4-year low, the majority of shareholders have an unrealized loss in the stock. By swapping their non-voting FOXA shares for voting FOX shares, these shareholders can realize their losses for tax purposes and actually reestablish their position at a discount!!! This is truly an unusual opportunity. ANY MUTUAL MANAGER THAT OWNS FOXA rather than FOX should have their head examined!
7. Finally, perhaps the best reason for investors to swap into the voting Class B shares is the ownership profile of Rupert Murdoch himself. Murdoch owns about 39% of the voting shares and less than 1% of the non-voting shares. Given Murdoch's long history of astute actions and occasionally controversial moves, it would be wise to be more aligned with his interests.
Disclosure: I am/we are long FOX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: More accurate disclosure: I am long FOX and short FOXA.