New-Model Murdochs: Fox Corporation to Emerge Tuesday

A new era for the Murdoch clan and the media business begins with the debut of Fox Corporation on Tuesday, a day before Disney completes its acquisition of 21st Century Fox.

The new-model Fox will begin trading Tuesday on the NASDAQ under the FOXA symbol. On Tuesday, 21st Century Fox will initiate a complex transfer of the Fox Corp. assets — primarily Fox News, Fox Sports, and Fox Broadcasting — to the newly created Fox Corporation. Fox Corp. will also fork over $8.5 billion in cash to 21st Century Fox prior to the separation to help Disney offset the tax bill for the transaction.

By 9:02 p.m. PT on Tuesday, Disney is expected to complete its acquisition of the remaining 21st Century Fox assets, buying out 21st Century Fox shareholders with a mix of cash and stock. On Tuesday, shares in Fox Corp. and 21st Century Fox will both be traded, but 21st Century Fox will be history as of Wednesday.

Fox Corp. is expected to keep a low profile on day one, other than the announcement of its board of directors, which is said to include Chase Carey, a 21st Century Fox board member and longtime Fox executive. On Thursday, Fox Corp. CEO Lachlan Murdoch will hold a town hall session for employees.

Fox Corp. will be extremely reliant on Fox News for the bulk of its earnings. Wall Street analyst Michael Nathanson estimates that some 86% of Fox’s earnings will come from cable programming, and 90% of those earnings will come from Fox News. Fox Corp. is projected to have earnings before interest, taxes, depreciation, and amortization of $385 million in its fiscal 2019, growing to $680 million by 2021.

Fox Corp. will have a strong balance sheet but it will be a much smaller company than before. In Wall Street terms, the stock will move out of the mega-cap S&P 100 index to the S&P 500. Nathanson has a buy rating on the stock at a $51 target price. He predicts the smaller company will be able to drive harder bargains for a handful of strong channels with MVPDs for higher retransmission consent revenue. The amount of reverse compensation — or money paid to the Fox network by its affiliates in exchange for programming — will also increase in the coming years.

“The slimmed-down combination of Fox News with the Fox Broadcasting Network 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,” Nathanson wrote in a March 15 research note.

The biggest changes are expected on the entertainment side, now that Fox Broadcasting will be a free agent when it comes to buying programming. The company has already invested in the NFL’s “Thursday Night Football” and WWE’s “SmackDown Live” in keeping with the focus on live programming to drive linear viewership.

“We think the company, absent a tethered TV studio to pump up, will become much more aggressive on managing their scripted entertainment content costs,” Nathanson wrote. “In other words, we would expect more shows like ‘The Masked Singer’ and less programs like ‘Empire’ in the years ahead.”

Even so, many Wall Streeters expect Fox to bulk up anew. “It doesn’t do them any good to hold cash. That isn’t a good return on capital. I do think you might see them add broadcast stations, but I would not be surprised if they pivoted into a different business with that cash,” says Laura Martin, a media analyst with Needham & Co. She says the company might even want to examine an asset like Roku that would help it expand more seriously into over-the-top content and distribution.

“I think it will be a very acquisitive company,” says UBS’ John Hodulik, who expects that Fox will look to buy something that will help burnish its sports and news assets. “I think the obvious opportunity is on the sports betting side, just because they have such a strong stable of sports rights.”

While Lachlan Murdoch is set to run the company, no one thinks his father, Rupert Murdoch, is going to sit on the sidelines.

“I don’t think Murdoch sees himself in any way as out of the game,’ says Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management. The elder Murdoch is “very engaged with the media world. He has always had newsprint under his fingernails. I think he will continue to burnish his efforts there.”

(Pictured: “The Masked Singer”)

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