2014.02 News Corp Investment Idea

8/13/2019 2014.02 News Corp Investment Idea

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A Current Investment Idea

News Corp

February 2014


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1

News Corporation (NWSA)

Twenty First Century Fox (formerly News Corp) spun off itsassets into new News Corp in June 2013

Globally diversified media and information services company

Owns leading news publishing brands (i.e. WSJ, Barrons, Sunday Times, etc)

Second largest english publishing companyHarper Collins

Leader in Australian sports programming channel and TV subscription provider

Strong AU real estate website

Capitalization

Enterprise Value: $6.4 billion

Equity Market Value: $9.0 billion

Operating Statistics (2)

2013 Revenues: $9.0 billion 2013 EBITDA: $688 million

Ticker: NWSA

Stock price: $15.52 (1)

(1) All financials in this presentation are as of 2/4/14 with closing share price of $15.52 and diluted shares outstanding of 578.8mm(2) Fiscal Year ends June 30


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Premium Content and Iconic BrandsNWSA Overview

Source: Company documents


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5/33

4

News Corps Discount to NAV Is Significant

$3,217

$973

$3,552

$3,728

$1,386

$234$715

$1,331$270

$13,436

$4,452

$8,984

$0

$4,000

$8,000

$12,000

$16,000

News Publishing REA Foxtel Fox Sports Amplify Corp. OH Net Cash Pension Def. NAV Discount Market Value

$ in millions

Net Asset Build

~50%discount

REA investment based on market value

Corp Overhead excludes Amplifys loss of operating


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5

News Corps Discount to NAV Is Significant Contd

$3,217

$973

$1,884

$3,728

$1,386

$234$715 $1,331 $270

$11,768

$2,784

$8,984

$0

$4,000

$8,000

$12,000

$16,000


$ in millions

Net Asset Build (1)

~30%discount

(1) REA valued through comparable versus NWSAs market value of its ownership in the public company; Corp Overhead strips outAmplifysloss of operating

REA based on public trading comps


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Factors and Drivers Behind ValueSegment Analysis


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(1) News, Publishing, and Digital Real Estate

$ in millions

Net Asset Build

$3,217

$973

$3,552

$3,728

$1,386

$234$715

$1,331$270

$13,436

$4,452

$8,984

$0

$4,000

$8,000

$12,000

$16,000


~50%discount


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News and Information Services

Third largest newspaper publisher in the world(1)

#1 newspaper in the US, AU, and UK market

Globally diversified with top brands

Dow Jones products cater to consumers and institutions

WSJ, Newswires, Factiva, Barrons, MarketWatch, and

SmartMoney

UK presence through the Sun and The Sunday Times

Generated $6.7 billion through print/digital advertisingand subscription based model for FY13

~60% of revenues come from advertising with the rest fromsubscription

Greater than 70% of total consolidated revenues

(1) "Top Newspaper Publishers, 2009." Market Share Reporter. Ed. Robert S. Lazich and Virgil L. Burton, III. 2012 ed. Detroit: Gale, 2012. Business Insights: Essentials. Web. 7Feb. 2014.

Strengths

Secular declining industry

Negative 5.7% revenue CAGR from 2011-2013

Negative 2.0% EBITDA margin compression during same timeperiod

The proliferation of internet has decreased readership amountyoung people

UK hacking scandal litigation erode valuation

Variant perception

51% of adult Americans still read a newspaper (43.4mm papersevery weekday and approximately 48mm on weekends )

Though in slow decline, I believe industry will not die but evolvewith technology (i.e. IPAD newspaper, digital locker, etc)

UK Scandal being indemnified by 21stCentury Fox noted in their10K filing

Concerns


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Operationally weak, and believe it will continue to do soNews and Information Services

$7,576$7,058

$6,731$6,363

$1,153 $939 $795 $643

0%

4%

8%

12%

16%

$0

$2,000

$4,000

$6,000

$8,000

2011 A 2012 A 2013 A 2014 E

Revenue - LHS EBITDA - LHS EBITDA Margin - RHS

Source: Company Documents, Capital IQ, and my estimates

News & Information Services 2011 2012 2013 2014E 11-'13 CAGR

Advertising $4,694 $4,388 $3,938 $3,607Circulation 2,522 2,326 2,370 2,297

Other 360 344 423 459

Revenue 7,576 7,058 6,731 6,363 (5.7%)

Operating Expense (4,294) (4,195) (4,099) (4,002)

Gross Profit $3,282 $2,863 $2,632 $2,361 (10.4%)

Margin% 43.3% 40.6% 39.1% 37.1%

Gross Profit $3,282 $2,863 $2,632 $2,361

SG&A (2,129) (1,924) (1,837) (1,717)

EBITDA $1,153 $939 $795 643 (17.0%)Margin% 15.2% 13.3% 11.8% 10.1%

$ in millions


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Estimate the News Segment Is Worth Over $3bn

10 yr avg: 7.3x

5-yr avg: 5.5x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

2004 2006 2008 2010 2012

* As of 2/4/14

EV/EBITDA Historical Trend of Public Trading Comps


Use 5.0x multiple which is near 5-year average(vs. current 7.4x) to reflect declining secular trends

News and Info Services Low Mid High

2014E EBITDA $643 $643 $643

(x) Multiple 4.0x 5.0x 6.0x

EV $2,573 $3,217 $3,860

Per Share $4.45 $5.56 $6.67

$ in millions

$ in millions

Company Share Price Market Revenue EBITDA Margin EV/EBITDA

Gannett Co., Inc. $26.36 $6,007 $5,161 $1,045 20.2% 7.4x

New York Times $13.75 $2,059 $1,491 $252 16.9% 8.2x

McClatchy Company $4.36 $376 $1,223 $289 23.6% 6.5x

Average 20.3% 7.4x


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Publishing SegmentHarper Collins

Second largest english publisher company

Harper collins carries some great brands with and authors with greatest number of titles on NY times best seller

100,000 active names in print and e-book Over 200 best sellers each year

Unlike the newspaper business, global market for books is growing with stable revenues

Digital e-books contribute more than 20% of revenues and it expected to grow

E-books have better economics than print

E-Book Contribution is GrowingMajor Title / Names

2.0% 3.0% 6.0% 10.0% 14.0% 18.0% 23.0% 28.0%

2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Print Ebook

Source: Company Investor Presentation, May 2013


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Book Publishing 2011 2012 2013 2014E 11-'13 CAGR

Consumer $1,124 $1,123 $1,286 $1,376

Other 66 66 83 $93

Total revenues 1,190 1,189 1,369 1,469 7.3%

Opex (906.0) (886.0) (1,028.0) (1,105)

Gross Profit 284 303 341 364 9.6%

Margin% 23.9% 25.5% 24.9% 24.8%

Gross Profit 284 303 341 364

SG&A (196) (217) (199) (201)

EBITDA 88.0 86.0 142.0 162.2Margin% 7.8% 7.7% 11.0% 11.0%

Segment Has Stable Revenues But Growing Margins

The penetration of E-books improves publishers

economics

Source: Company filings and my estimates

$ in millions


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Estimate the Publishing Segment Is Worth $970mm

* As of 2/4/14



Use 6.0x multiple as Scholastic is a close comp

10 yr avg: 9.3x

5-yr avg: 8.4x

0.0x

3.0x

6.0x

9.0x

12.0x

15.0x

2004 2006 2008 2010 2012

Select Peers' Average 10 yr avg 5 yr avg

Bookpublishing Low Mid High

2014E EBITDA $162 $162 $162


EV $811 $973 $1,135

Per Share $1.40 $1.68 $1.96

$ in millions


Scholastic Corp $31.98 $1,017 $1,785 $165 9.3% 5.9x

Pearson 10.88 8,801 5,160 880 17.1% 12.5x

Average 13.2% 9.2x

$ in millions


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Digital Real Estate Services

NWSA owns 61.6% of REA Group Limited

Publicly traded company on the ASX (ASX: REA)

$5.8bn market cap

Provides largest AU residential property website

Online advertising services for residential and commercial properties for sale and rent

Online display advertising space for advertisers in various industries

Source: Company Investor Presentation, May 2013

$235

$286

$345

$418

$102$129

$168 $191

40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

$0

$100

$200

$300

$400

$500

2011 2012 2013 2014E

Revenues - LHS EBITDA - LHS Margin% - RHS

Leads to Strong Revenue and EBITDA TrendsREAs Offerings & Competitive Position


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Two Different Approaches to Value This BusinessValuation

Market Valuation

REA AU Market Value

Shares (mm) 131.7

(x) Share Price $43.78

(x) Avg. Exchange Rate $1.00

Market Valuation $5,766

(x) NWSA Ownership 61.6%

NWSA Value of REA $3,552

Per Share $6.14

Comps Method

Due to Trulia and Zillow lack of history, usinginternet software services average multiple

Internet Software and Services 2010 2011 2012 2013 Feb-14

TEV/Total Revenue 4.8x 4.0x 4.3x 6.4x 5.9x

TEV/EBITDA 15.2x 12.7x 14.3x 19.7x 19.9x

2010 - 2014 Average 16.4x

Source: CapitalIQ

REA AU Low Mid High

2014E EBITDA $118 $118 $118


EV $1,767 $1,884 $2,002Per Share $3.05 $3.26 $3.46

Currently, the market is valuing NWSA equitystake in REA at $3.5 billion

However, the market is potentiallyovervaluing the equity because its intrinsic

value is closer to $1.8 billion today.

Source: Company Documents, Capital IQ, and my estimatesREAs EBITDA is $118mm ($191mm 2014E times NWSA REA Share (61.6%)

$ in millions, unless stated otherwise



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NWSA Valuation Build-Up

(1) NWSA stated in Investor Presentation (May 2013) Foxtel debt was $2.1B. NWSA share is 50% of it(2) Corp overhead estimated to be 143m of pre-tax expenses per year, capitalized at 5x

Base Case (Mid)

Low Mid High per shareBusiness Segments Discussed

News and Info Services $2,573 $3,217 $3,860 $5.56

Publishing 811 973 1,135 $1.68

Digital Real Estate Services (REA) - Market 3,552 3,552 3,552 $6.14

Other Business Segments

Foxtel $0.00

Fox Sports $0.00

Amplify $0.00

Cash $2,381 $2,381 $2,381 $4.11

Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)

Net Cash Equivalent $1,331 $1,331 $1,331 $2.30

Less: Corp Overhead (2) ($715) ($715) ($715) ($1.24)

Less: Unfunded Pension Obligation (270) (270) (270) ($0.47)

Equity Value - REA Market $7,282 $8,088 $8,893

Share Price $12.58 $13.97 $15.37 $13.97

Current Stock Price $15.52 $15.52 $15.52

% Prem ium / (Discount) to Curren t (18.9%) (10.0%) (1.0%) (10.0%)



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(2) Foxtel & Fox Sports

$ in millions

Net Asset Build

$3,217

$973

$3,552

$3,728

$1,386

$234$715

$1,331$270

$13,436

$4,452

$8,984

$0

$4,000

$8,000

$12,000

$16,000


~50%discount


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19

Foxtel

Largest pay TV Provider in Australia

Over 2.3 subscribing households, equivalent to 30% of the population in Australia

Deliver more than 200 channels including premium sports and content from Fox Sports Australia

Exlusive broadcast rights for Fox Sports relationship and HBO positions Foxtel well

HBO has orginal content, like Game of Thrones, which is considered to be must have programming

Exlusive contracts for rugby, soccer, and australian Football, ranging until 2015 - 2017


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Used when investor has no control butsignificant influence

Proportionate share of earnings or loss flowthrough the income statements as a one lineconsol idat ion i tem below net income

Effects of Equity Method Accounting

Source: The Practioners Guide to Investment Banking

NWSA earnings understated if only looking at EBITDA. Therefore, need toinclude Foxtel value in the sum-of-the- parts analysis

Equity Method Accounting Understates Foxtel Value


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Estimate the NWSA Share of Foxtel Is Worth $3.7Bn

* As of 2/4/14


Pubic Trading Comps

Foxtel Low Mid High

2014E EBITDA $932 $932 $932


EV $6,524 $7,456 $8,388

(x) NWSA Share 50.0% 50.0% 50.0%

EV $3,262 $3,728 $4,194

Per Share $5.64 $6.44 $7.25

Company Share Price Market Revenue EBITDA Margin EV/EBITDATime Warner Cable $135.90 $37,767 $22,120 $7,980 36.1% 7.8x

Comcast $53.52 $139,014 $64,657 $21,434 33.2% 8.7x

Direct TV $68.81 $36,156 $31,214 $7,731 24.8% 7.1x

Cable Vision $16.39 $4,386 $6,738 $1,708 25.3% 7.9x

Average 31.3% 7.9x



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Leading sports programming provider and haveexlusive rights to many popular sports

Generates revenue primarily through affiliate feespayable under these carriage agreements, as well asadvertising sales

Majority of Foxtel household subscribe to Fox Sports

Foxtel and Fox Sports relationship are symbiotic asthey both need each other (i.e. good synergies)

Subscribers want access to original content and live sports

Increases stickiness and adoption, which leads to lowerchurn rates and higher ARPU

Fox Sports needs a distribution network, and Foxtel catersto 30% of Australia

Fox Sports

Source: Company Documents


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Having exclusive rights to original content and live events is key to

keeping subscribers and maintaining competitive position

Sports Is A Key Attraction For Cable TV Subscribers(1)

Portfolio of Major Sports Rights

Source: Company Documents,


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Estimate Fox Sports Is Worth Close to $1.4bn

* As of 2/4/14



Use a 11x vs. 5-yr average of 11.6x forconservatism

$ in millions

$ in millions

5 yr avg: 11.6x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

2008 2010 2012


Discovery Communication $78.03 $27,067 $4,941 $2,184 44.2% 15.8x

AMC Networks $62.70 $4,532 $1,523 $520 34.2% 12.1x

Starz $27.04 $3,056 $1,785 $443 24.8% 9.7x

Average 34.4% 12.5x

Fox Sports Low Mid High

2014E EBITDA $126 $126 $126


EV $1,260 $1,386 $1,512

Per Share $2.18 $2.39 $2.61


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NWSA Valuation Build-Up


Including Foxtel and Fox Sports adds +$8 per share

Base Case (Mid)

Low Mid High per share

Business Segments Discussed


Publishing 811 973 1,135 $1.68



Foxtel $3,262 $3,728 $4,194 $6.44

Fox Sports 1,260 1,386 1,512 $2.39

Amplify $0.00

Cash $2,381 $2,381 $2,381 $4.11

Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)





Share Price $20.39 $22.81 $25.22 $22.81


% Prem ium / (Discount) to Curren t 31.4% 47.0% 62.5% 47.0%



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(3) Amplify

$ in millions

Net Asset Build

$3,217

$973

$3,552

$3,728

$1,386

$234$715

$1,331$270

$13,436

$4,452

$8,984

$0

$4,000

$8,000

$12,000

$16,000


~50%discount


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Fully integrated technology based learning solution

for the $40 billion addressable market throughtablet based platform (1)

Teachers can monitor students

Administrators can deploy content to tablet

Districts can evaluate schools with custom standardizedtests

Digital delivery of high-quality curriculum toimprove the K-12 market

Attempting to address the problem that from 1970 - 2010education system has doubled their investment from $5kto $11k but the NAEP test scores have remained thesame (2)

Education Bet: K-12

Amplify

(1) http://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embedded(2) http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0
http://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embedded


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Amplify Estimated Worth is $234mm

Amplify Low Mid High

Original Investment Cost $390 $390 $390

(x) Discount Factor 20.0% 60.0% 80.0%

Value $78 $234 $312Per Share $0.13 $0.40 $0.54

News Corp paid $390 million in 2011 and invested an additional ~$180mm

Applying a discount to original investment,

Amplify is worth ~$234mm



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What is NWSA Worth?

Base Case (Mid)


Business Segments DiscussedNews and Info Services $2,573 $3,217 $3,860 $5.56

Publishing 811 973 1,135 $1.68



Foxtel $3,262 $3,728 $4,194 $6.44

Fox Sports 1,260 1,386 1,512 $2.39

Amplify 78 234 312 $0.40

Cash $2,381 $2,381 $2,381 $4.11

Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)





Share Price $20.53 $23.21 $25.76 $23.21






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Appendix


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NWSA Valuation


REA Valued Based on Comps (Market Correction on REA Value)

Base Case (Mid)


Business Segments Discussed


Publishing 811 973 1,135 $1.68

Digital Real Estate Services (REA) - Comp Method 1,767 1,884 2,002 $3.26


Foxtel $3,262 $3,728 $4,194 $6.44

Fox Sports 1,260 1,386 1,512 $2.39

Amplify 78 234 312 $0.40

Cash $2,381 $2,381 $2,381 $4.11

Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)




Equity Value - REA Comp Method $10,097 $11,768 $13,361

Share Price $17.44 $20.33 $23.08 $20.33



Base Case Valuation ranges from $20-$23

depending on REA method of valuation


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$0

$4

$8

$12

$16

$20

Jul-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

Bought shares inDecember, January and

February for an averagecost of $16.76 per share

News Corp Share Performance

2014.02 News Corp Investment Idea

Documents

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