The two publicly traded companies, both roughly 40 percent owned by the Murdoch Family, split in 2013. Of course, the Fox of 2022 isn’t quite that Fox after selling off so much of its assets to Disney in a 2019 deal valued just north of $71 billion. But this Fox remains quite formidable for its size and has been Moffett Nathanson’s lone “Buy” in media for a while now.
While that’s high praise, it also means Fox is undervalued — and that kinda sucks. So how does a company go about unlocking that shareholder value? Often it’s sell, sell, sell — at least some of the parts in a sum-of-the-parts approach to valuation. But that isn’t this.
There is precedence for a split followed by reconsideration: Viacom and CBS divorced in 2006 and came back together in 2019. That one, we’d argue, made a bit more synergistic sense. “This is not exactly how we envisioned the Fox endgame playing out,” Moffett Nathanson wrote on Monday of the News Corp talks.
While Moffett Nathanson “have long believed that Fox was unlikely to remain an independent company,” this is a case where Mom and Dad getting back together does not appear to be better for the kids. While the analysts do believe “the ultimate payoff” for Fox shareholders can only come from a re-evaluation of Fox’s independence, they noted: “Just not like this!” This is just too confusing for investors, they suggested.
A deal with or for Fox makes much more sense for a media/digital company looking to scale via sports rights, production, and maybe even get a broadcast network, they wrote. And if none of them would or could buy Fox, private equity might; but this… this has Michael Nathanson’s group collectively “scratching our head,” their research note read.
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Beyond the question of Why is the question of, Why now? Moffett Nathanson has its fingers crossed for shareholders that the Murdochs are “using this announcement to seek outside bids for specific assets,” like the Fox broadcast network and TV stations. “We sure hope so as we do not believe Fox investors will be happy with this outcome as currently announced,” they wrote.
Right off the bat, they were not happy. Shares in Fox dropped 8 percent on Monday, a strong indication that the equity analysts at Wells Fargo say “suggests investors aren’t convinced by [the potential merger’s] merits.” Meanwhile, shares in News Corp were up 3 percent, so we know which side Wall Street thinks would be getting the better deal of a recombination. (In the very early going on Tuesday, the Fox losses rebounded a bit and News Corp rose once more.)
General market movement on the Fox side is not the only indication of shareholder displeasure. Activist investor and major News Corp shareholder Irenic Capital Management wants the Wall Street Journal owner to “explore splitting its online real estate listings unit from its other businesses,” the New York Times reported on Monday. News Corp businesses also include Wall Street The New York Post and book publisher HarperCollins.
Fox holds its annual shareholders meeting November 3, so the clock is ticking for a little bit of clarity. Wells Fargo cautioned that if Fox executives don’t make their reasoning clear on the company’s fiscal (for Fox) first-quarter earnings conference call, which will also take place within a few weeks, the stock could become further “depressed.”
“The worst thing management can do is avoid explaining why this merger is currently under consideration,” they wrote. Wells Fargo, less wholly bearish on the idea than Moffett Nathanson, did offer one plausible explanation for the two companies to come back together.
“We can see how combining Fox News with the news assets at News Corp could deliver content creation and distribution synergies.” OK, so that’s one reason. Whether or it is enough for the special committees, for shareholders, and for Wall Street as a whole remains to be seen.