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Analysis: Fox Corp. to debut as US cable powerhouse, but long-term risks remain

Fox Corp., the slimmed-down, U.S.-centric successor to 21st Century Fox Inc., is set to join the S&P 500 index on March 19 as a U.S. cable powerhouse.

Long term, however, analysts caution that the new Fox could face challenges to its streamlined news- and sports-focused model due to escalating sports rights costs and the lack of a TV production facility.

Fox Corp. — scheduled to emerge as a new entity just ahead of Walt Disney Co.'s close on the acquisition of myriad TV, film and international Fox assets on March 20 — will hold a portfolio encompassing longtime cable news leader FOX News Channel (US) and FOX Business Network (US) and 28 TV stations, as well as an array of national sports rights, including a pair of National Football League packages, an extended deal with MLB's top offering, and college football and basketball.

"The slimmed-down combination of FOX News with FOX (US) creates an unrivaled pair of must-have live sports and news content that will drive strong, industry-leading top line growth for years to come," wrote MoffettNathanson analyst Michael Nathanson in a recent research note.

Naveen Sarma, an analyst at S&P Global Ratings, agreed, though he cautioned that disruption to the TV market could change the landscape for Fox. "As long as the current TV world largely continues to survive, Fox Corp. should do well for the next several years," Sarma said.

Both analysts said Fox's cable networks will fuel the new company. Nathanson estimated that 90% of Fox's cable networks EBITDA is tied to the Fox News brand, with 9% from FOX Sports 1 (US) and FOX Sports 2 (US).

"No matter how you feel about FOX News, there is no denying it's a very powerful brand that throws off large affiliate fees and high ad revenues," Sarma said.

On the broadcast side, Nathanson said Fox television is sitting on upside as carriage negotiations are slated with five major distributors between 2019 and 2021. Without the weight of having to defend long-tail cable networks, Fox might be much more aggressive in negotiations with distributors, which could lift retransmission-consent revenue substantially, the analysts wrote.

Sarma said he expects the new Fox will look to broaden its station base at some point, particularly around NFL markets, though Bloomberg News reported that Fox Corp. is backing away from buying TV stations being divested as part of the compliance of regulatory ownership limits under Nexstar Media Group Inc.'s proposed purchase of Tribune Media Co.

Fox's current cycle of NFL rights deals expire after the broadcaster's presentation of Super Bowl LVII on Feb. 3, 2023, and prices are likely to rise due to increasing sports interest from digital behemoths such as Amazon.com Inc.'s Prime Video, as well as other broadcast networks. As a much smaller company than its predecessor, Fox Corp. could be facing a higher NFL bill — perhaps $500 million to $1 billion annually — that draws from its cash flow, Sarma said.

Nathanson estimates that FOX generated 55% of its gross ratings points from coverage of NFL, MLB and college football in 2018, so a loss of rights, especially from the pro-football league, would be acute and could force it to license more entertainment content from third parties, since its TV production unit is becoming part of Disney.

"We think the company, absent a tethered TV studio ... will become much more aggressive on managing their scripted entertainment content costs," said Nathanson. To that end, he expects Fox will not be home to as many scripted shows like "Empire" in the future, but will instead turn to more unscripted fare like "The Masked Singer," the quirky competition show that became a surprise hit in 2019.

Among media peers, Sarma said the new Fox Corp. is most like CBS Corp., except CBS owns a TV studio. "What's Fox Corp.'s end game from a longer outlook?" he asked. "Will they make a play for other assets beyond TV stations and look to a TV production company? We'll see."

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