May has been an eventful month at Twenty-First Century Fox (FOXA).
Fresh from the tale of the Bill O’Reilly sexual harassment suit, Wendy Walsh called on Britain to block Fox founder Rupert Murdoch from taking full control of Britain's pay-TV group Sky. The deal was cleared by the European Commission last month, but a similar takeover attempt in 2011 was derailed by a phone-hacking scandal at one of Murdoch's British newspapers, revealing close ties between politicians, police and the media. According to Bloomberg, Fox is willing to negotiate changes to corporate governance, but it doesn’t expect to be asked for major alterations.
The purge has continued throughout the month. Just five days ago, the company fired Bob Beckel, a co-host of “The Five,” for making an "insensitive remark" to a minority IT worker. All this negative news has pushed the stock down 12% in the last two months. That’s good for about $6 billion of shareholder value being wiped away. It’s anybody’s guess how much this will cost the company. Is it a time to "be greedy when others are fearful?"
Fox seems really focused on acquisitions but maybe the wrong kind. It should start looking more and more at the internet for full acquisitions. Fox invested in New York’s Vice Media back in 2013, pushing founder Shane Smith’s net worth north of $1 billion and helping the company improve content offerings even more. This is the type of direct acquisition that Fox should pursue, if possible.
On the good news side, Fox’s newest movie release, "Alien: Covenant," has already produced over $130 million in revenue on a budget of $97 million. This is a super small drop in the bucket on $28 billion in total company sales, but with a network that reaches 116 million households, Fox has a solid moat around it. This will remain true even as more and more content gets delivered via the cloud (aka “the internet”). The company is definitely worth more than $50 billion based just on its brand name, but the last decade has seen a lot of stagnation.
Fox has had a Microsoft (MSFT, Financial) decade (circa 2000-2010) with its stock flat since the 2008 crisis. The need to create or tap into some new growth should be the priority for Fox.
Revenues have gone nowhere since 2007, and despite buying back 40% of the outstanding shares, both earnings per share and book value are flat to down. This is a primary example of a company having an economic moat and still not producing gains for shareholders. The company absolutely pounds out cash, but without profit and/or book growth, it will continue to founder.
The company will be around in 20 years, and television will still be watched by the masses regardless of how the delivery changes. It’s likely that binge watching will become the norm with all the networks catching up with Netflix (NFLX, Financial) and releasing shows all at once or over a three-day period – like the new "12 Monkeys" from SyFy.
For me, the valuation is too hard to deduce at this point, but many big-time money managers have bought in, including Donald Yacktman (Trades, Portfolio), Jeff Ubben (Trades, Portfolio) and Seth Klarman (Trades, Portfolio). Ubben’s ValueAct Capital owns over 53 million shares; he has a board seat and is known as an activist investor. The challenge is that by the time Fox shows some signs of higher financial performance, the stock will already be outside the range of buying it.
It may be now or never.
Disclosure: I do not have a position in Fox.
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