Disney-Fox Deal: Murdochs On ‘New Fox’ Strategy And “The Next Great Leg Of Our Journey”
Rupert Murdoch had a similar take to that of many media veterans on Disney’s $66B acquisition of assets of 21st Century Fox. He called it “a momentous occasion for me, our investors and thousands of colleagues who have joined us over the years in building 20th Century Fox.”
During a conference call with investors this morning to discuss the “next great leg of our journey,” Murdoch was joined by sons Lachlan and James as well as CFO John Nallen.
The execs detailed the outlook for “New Fox,” the name for the parts Disney isn’t acquiring, chiefly the Fox broadcast network and stations, Fox News and sports networks FS1 and FS2. The remaining company will have annual revenue of around $10 billion and EBITDA of $2.5 billion. Speculation has grown about the future of “New Fox,” with potential scenarios including a combination with Murdoch-controlled News Corp. or a move to take the company private.
The elder Murdoch said New Fox “will be a growth company centered on live news and sports and the brand strength of the Fox Network… probably the strongest brand in all of television.”
Disney’s motivation is clear, as the company is eager to expand its global reach and stock its planned OTT service with attractive product, but Fox’s interest remains somewhat opaque. Many investors and industry veterans have expressed surprise that the elder Murdoch, having spent 40 years building a media empire, would choose to sell so much of it now, with many units at multi-year lows.
Passion for the news business–the ink-stained newspaper operations where it all began–goes a long way toward explaining the move, and that was Rupert Murdoch’s positioning on the call. “Those that know me know I’m a newsman with a competitive spirit,” Rupert Murdoch said.
Responding to a question about the growth rate and carriage leverage of the cable portfolio now that FX and NatGeo are being removed, he maintained, “We’re in a stronger position if anything with FBC and NFL and particularly Fox News… Fox News is something that no one can afford to drop. [Former Dish Network CEO] Charlie Ergen tried it for six weeks and lost 150,000 customers. We’ve lost some of our stars, but we’ve lost none of our audience. It’s extraordinary.”
For Lachlan Murdoch, who is Executive Co-Chairman of News Corp. and 21st Century Fox, if the merged business is about scale, New Fox “is about returning to our roots as a lean, aggressive challenger brand” that will explore “disruptive distribution.”
Although the parties declined to discuss Hulu, Lachlan said the digital strategy for New Fox “is the same as for Old Fox. We’ve been pretty open for some time in saying we believe all of our content and channels will ultimately have a direct-to-consumer distribution element as well as traditional distribution combined. We expect the same thing here.”
As to whether New Fox would combine with News Corp whose holdings include the Wall Street Journal, the New York Post and The Times of London, Murdoch Sr said, “If we do it, it’s way, way in the future.”
Lachlan called the transaction a matter of “simple logic.” The assets merging into Disney “will bring that company new creative opportunities, established intellectual property and global reach… Managed correctly, they could thrive under Disney ownership.”
James Murdoch, CEO of 21CF and Chairman of Sky, called the deal “a game-changer like no other… The new Disney is well positioned to be a pacesetter in a dramatically competitive global marketplace. New Fox will have a unique focus on live, and is a brand that matters to viewers in the U.S.”
He noted that Fox is “totally committed to closing the Sky transaction” for the 61% of the company that it does not already own and expects it to close before the Dis-Fox acquisition is final, or possibly by the end of the fiscal year. His father noted he sees “no problem” with the deal moving ahead. “If anything goes wrong, the existing shares of Sky will still go to Disney” so it will be “up to them what to do.”
On why the regional sports networks were sold given the focus the company has on sports, James said, “When we looked at the mix of businesses, we were mindful of what the fit was – both New Disney and New Fox are in the sports business – so it was a question of where the best fit was and what was going to generate the most value for shareholders.”
Chiming in, Rupert added, the “RSNs would have added a huge tax burden.”
As for growth, there is an opportunity especially on the local station front, Rupert said, “There will be opportunities that will depend on the price. (New Fox) is going to have a free cash flow we expect of at least $2B a year… We’ll be in a mood to expand and do new things and we’ll have the ability. It will be somewhat under-leveraged very quickly.”
Rupert also noted about production on the TV side, “FBC can make our own programs. As the networks tend to make more and more of their own programs, people like Warner Bros and Sony will be looking to us to buy programs so I think we’re in a strong position for getting all of the programs we need.”
Using fiscal year 2017 as a guide, New Fox will have $10B in annual revenues and $2.8B in EBITDA. Nallen said it would have “a strong investment grade balance sheet” levered with $9B of new gross debt and $7.5B of net debt as well as “robust cash flow.”
The deal paves the way “for the New Fox and a transformed Disney to chart a course across a broad frontier of opportunities.” Fox, Rupert Murdoch said, “will continue to flourish… Bob Iger will cherish the talent he is inheriting.”
Lachlan also noted the next few months will be about working on the management structure and acknowledged that “many” employees “have found this to be a very difficult time.” He added, “Sometimes the right decisions are the hardest ones and this is no exception.”
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