With the pending sale of its movie and TV studio business, its international assets, and cable and regional sports networks to Walt Disney Co. in a stock deal valued at $52.4 billion, the new 21st Century Fox Inc. will emerge as a more focused, U.S.-centric entity.
Immediately prior to the acquisition, which could take 12 to 18 months, the company will be spun off to 21st Century Fox shareholders, with a portfolio comprising FOX (US), its 28 owned TV stations, FOX News Channel (US) and FOX Business Network (US), as well as national cable channels FOX Sports 1 (US) and FOX Sports 2 (US), Spanish-language service Fox Deportes and its stake in the Big Ten Network. Executives on the Dec. 14 conference call discussing the deal referred to the remaining assets as "New Fox."
Lachlan Murdoch, co-executive chairman, on the conference call said "New Fox is about returning to our roots as a lean, aggressive challenger brand, focused at the beginning on must-watch news and live sports. The business is positioned to explore potentially disruptive distribution and monetization strategies."
That disruption, at some point, will manifest in streaming offerings. "We've been pretty open for some time in saying that we believe that all of our content and channels will ultimately have a direct-to-consumer distribution element, as well as a traditional distribution combined. So we would expect that the New Fox channels to have a direct-to-consumer platform as actually part of the deal," he said, noting the company is retaining the technology, which it has been developing over the past year, to enable the over-the-top additions.
Telsey Advisory analyst Tom Eagan in a research note wondered what the company’s appetite might be for acquisitions, relative to any assets that might become available from AT&T Inc.’s pending purchase of Time Warner Inc., which the U.S. Department of Justice has filed a lawsuit to block; major-market TV stations owned by Meredith Corp. that might be put up for sale in the wake of its purchase of Time Inc.; or a possible reunion with News Corp.
21st Century Fox founder and Executive Chairman Rupert Murdoch, when asked on the call if the company is amenable to expanding its station footprint, replied "Well, yes, as far as the stations, there will be opportunities. It will depend on the price. Certainly, if we had more, it would give us greater strength in getting [syndication] clearances."
The company founder also dismissed reports — for now — that 21st Century Fox might reunite with News Corp: "We haven't thought about combining with News Corp. And if we do, it's way ahead of the future."
The elder Murdoch also addressed a question about whether the strategy would change at the broadcast network since it would no longer have access to content from the 20th Century Fox TV studio.
"We can make our own programs [or buy them] from 20th TV," he said. "As the networks make more and more of their own programs, people like Warner Bros. and Sony will be looking to us to buy programs. We’re in a strong position for getting all the programs we need."
Pivotal Research analyst Brian Wieser said the one negative consideration from the transaction is that FOX will continue to vie with ESPN (US) for national sports rights. Those fees, he wrote in a research note, are "already likely to undergo significant inflationary conditions as significant packages of content become available given the likely presence of Facebook, Amazon, Alphabet and Verizon as bidders in addition to Disney, Fox, Comcast and CBS. This view underpins our expectation for ongoing margin pressures for both companies’ domestic cable networks businesses."
Questioned about potential strains on profitability if sports rights continue to escalate, CEO James Murdoch said the company’s current NFL and MLB deals extend into the next decade. "So we have pretty good visibility of that. And I think when you look at the New Fox, it's a business that has really substantial scale and concentrated scale in its core market of the United States. And we'll be competing for rights on an ongoing basis in what has always been a competitive market for rights."
FOX Sports also holds rights to UFC, NASCAR and major college conferences, notably the Big 10, Pac-12, Big 12 and Big East.
When the Disney deal is consummated, it will no longer own 22 regional sports networks, home to 44 professional teams. Michael Nathanson, senior research analyst at MoffettNathanson, in a research note listed the regional sports networks, plus the stake in Big Ten Network, as the most valuable part of the deal at some $23.5 billion. He asked about the company’s thinking about divesting the regional sports networks on the call.
"I think when we looked at the mix of businesses and structuring this transaction, we're really mindful of what the fit was for each business," said James Murdoch. "Obviously, both the new Disney and the New Fox are in the sports business, and it was really a question of where the best fit was and also what was really going to generate the most value for shareholders and how that works."
Added his father: "I would just say that if we kept RSNs, it would have added a huge tax burden to the spin."
CFO John Nallen said that using fiscal 2017 financials as a pro forma reference, New Fox would have approximately $10 billion of annual revenue and $2.8 billion of EBITDA, including an estimate of incremental public company corporate and shared costs. The company will also have a strong investment-grade balance sheet, he said, "conservatively levered with a maximum of $9 billion of new gross debt, $7.5 billion of net debt and under 3x net leverage out of the box.”
He noted that New Fox will be positioned to continue to deliver consistent growth, driven by affiliate and retransmission-consent revenue growth and strong advertising demand for its news, sports and entertainment product. "We also expect robust free cash flow generation at New Fox from the strong conversion of earnings into free cash flow," he said. That will be enhanced by $1.5 billion of each year's taxable income being "sheltered on a deductible basis for 15 years."