A Foxier FOX

Leaner and Meaner

There has been much written about Disney’s acquisition of key 21st Century Fox assets, with much of the media rightfully focused on how this benefits Disney. The press is full of quotes from executives like John Landgraf of FX and others celebrating the gains that Disney will make from the Fox deal (which it will). However, the new Fox will also enjoy significant advantages.

Is it possible to have both parties in a mega-transaction be considered winners?

The Transaction – What Fox Keeps
For the $66 billion, Disney acquired most of 21st Century Fox’s domestic and international entertainment assets, though it did not get everything. Not included in the deal were the Fox Broadcast Company, including its 28 owned stations, Fox Sports, Fox Sports 1 & 2, Fox Deportes, and the Fox Studio lot located in Los Angeles. Revenues for this new entity are estimated to be in the range of $10 billion.

What Fox was Likely Thinking?
There were many factors that likely contributed to Fox’s decision to cash in.

  • The $66.1 billion price tag –- That’s a lot of money and will give Rupert Murdoch a lot of flexibility for future investments (and Fox is now debt free, never a bad thing).
  • The rapidly changing media environment –- Murdoch likely felt that Fox was ill equipped to compete in the world of quantum media. With new and free-spending competitors like Amazon, Google, Netflix, and Facebook, Fox would be considered a small player in the industry.
  • Back to basics — Rupert Murdoch is at heart a news guy, and the timing was right to return his focus to his core businesses.
  • Succession –- There now seems to be a clear succession plan for Mr. Murdoch, with his son Lachlan staying with Fox and James moving over to Disney.
  • Regulatory environment –- The Trump administration’s permissive M&A environment makes the timing of this transaction spot on.

What Fox will look like in the Near-Term

Fox Broadcasting Company (Fox) — Without its own content production group, smaller projected audiences, and decreased ad revenues, Fox will likely be forced to increase its reliance on less costly programming including reality series, sporting events, and news programming. There is also a real possibility that Fox will be sold to a major studio that is not currently aligned with a network.

Fox News –- Because of Rupert Murdoch’s stated passion towards news, Fox News is likely to become the crown jewel of the smaller Fox organization. That being said, Fox News will face new challenges from the extreme right, including a bigger, bolder Sinclair Broadcasting Group. Assuming the Sinclair-Tribune Merger is approved, Sinclair will own 233 television stations reaching 72% of US households. (Based on the FCC’s UHF discount math, Sinclair is technically considered in compliance with the current rules).  * Ownership numbers do not include the likely Fox purchase of 10 Sinclair Stations.

Fox Stations Group — Assuming the elimination of the station ownership rule restricting television station groups to a reach of 39% of US households, it is likely that Fox (currently with 28 stations of its own and a 37% reach, will take some of its extra cash and purchase additional television stations to keep its reach competitive with Sinclair. In fact, it was just announced yesterday (1/10/2018) that Fox is in talks to purchase 10 Tribune Stations from Sinclair. All 10 stations are currently Fox affiliates.

The 10-station Fox purchase from Sinclair will be helpful on all sides.  Sinclair will benefit because it increases the odds of being compliant with FCC ownership rules, and Fox will benefit because many of the stations added are in valuable NFL Cities.

News Programming & Corporate Structure — Rumors also abound that Murdoch will take the remaining assets of Fox private, enabling the organization to be take more controversial positions on key social and political issues without shareholder buy-in.

Fox Sports — Fox still has the crown jewel in sports, the NFC portion of the NFL package, plus the Super Bowl every three years. The NFL package is insurance that Fox will continue to be a force in sports, and the Fox purchase of some of the Sinclair stations further improves the revenue picture even more. Also, with additional cash and the ownership of FS1, FS2, and Fox Deportes, Murdoch will likely invest in additional sports programming.

Is Fox a Winner or Loser in this Transaction?
Did Rupert Murdoch and Fox make the correct decision in selling their key entertainment assets? The answer is YES and NO. It just depends on your perspective.

Winners: Rupert Murdoch and his sons, Disney, attorneys, investment bankers, and independent station groups.

  • 21st Century Fox was ill-equipped to handle the brave new world of broadband video. Rather than compete against a significantly broader group of competitors with deeper pockets, Fox took the best deal that it could and is now flush with cash.
  • Rupert Murdoch is 86 years and old has given his children a succession plan.
  • Murdoch can focus his assets on his true passion: News.
  • Fox Sports has major assets, valuable NFL distribution rights chief among them.
  • Flush with cash and being debt free means that the new Fox can invest strategically, or even take the company private.
  • There will likely be a bidding war for independent stations groups that would be a strategic fit for Fox. Now, flush with cash, Fox can better compete for the stations that it wants. The announced Fox talks to purchase the 10 Sinclair (Tribune) affiliates is clear evidence that a stations acquisition strategy has begun.

Losers: Fox and Disney Employees, as thousands of jobs will be lost and the “edgier” Fox assets that do not fit in with the Disney culture.

  • While Fox will have more cash and some great assets, it has placed a bet on old thinking and old technology. I am convinced that basing your success on linear TV stations, cheaper programming, and live news and sports is not a viable path to long-term success (certainly not as much as it was in Murdoch’s early days).
  • When the NFL TV package expires, there is no guarantee that Fox will be able to renew its NFC contract and, even if does, the competition will be fierce. To make matters worse, NFL TV ratings continue their downward trend, and revenues, while still strong, are destined to fade. The economics of sports have changed and are likely never to return to the level that they once were.
  • Positioning news programming to the political right in order to compete with the likes of Sinclair will ultimately backfire.
    • The Donald Trump Presidency has stoked ratings for all news outlets, but once he leaves office I project a precipitous drop in all news ratings.
    • Programming far to the right or left makes your audience too niche to support a viable economic outcome in the news business.
  • It may prove difficult for Disney to incorporate some of the edgier Fox Networks such as FX and FXX. While former Fox executives may be saying all the right things, networks like FX and FXX will likely find their autonomy greatly diminished in order to fit in with the family-friendly Disney culture.

Conclusion
I was once given sage advice by a professor who was also a high-ranking Wall Street investment banker. He said, “Any idiot can BUY a stock, but it is only the really smart people that know when to SELL a stock”.

Rupert Murdoch is betting that now is the right time to sell most of the 21st Century Fox assets. Based on his track record of success, and his investment time horizon, he likely made the right move. Fox will have to work hard to re-package itself to remain competitive, but I would not bet against it beating the odds.

 

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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