Fox up 30% on news of Wall St bidding war

Dubai - Dismemberment of Fox's media empire a response to failure to gain control of Sky

The biggest bombshell in global media last week was the revelation that Disney, Comcast and Verizon were in talks to buy some of 21st Century Fox's strategic brands, such as Sky (the UK/Europe's preeminent pay TV platform with 22.5 million subscribers), Fox's cable networks (FX, National Geographic), Hollywood movie studio (X-Men, Avatar) and international assets (Star TV). This led to an immediate 30 per cent surge in Fox shares, which I had profiled in this column on June 19, 2017 as an undervalued global media conglomerate. Something big is obviously happening in the House of Murdoch.
Citizen Rupert's son James is the CEO of Fox in New York and the potential sale of Fox's television, film and cable assets could well ignite a bidding war that could well involve Comcast, Charter communications, Verizon, Amazon in addition to the House of Mouse in Burbank. The Disney talks confirm one basic fact. Fox is in play on Wall Street and the world's most powerful content generators and cable networks cannot ignore its media assets, technologies, brands and distribution platforms. So my recommendation to own Fox was a licence for UAE investors to make money in this bidding war.
The dismemberment of Fox's media empire is a response both to the failure to gain control of Sky with a $15.4 billion bid opposed by the UK regulators and powerful politicians in Westminster as well as the sheer scale of the AT&T-Time Warner merger. Given that Rupert Murdoch is 86, the world's richest media clan could well have decided that the timing was right to solicit and receive top dollar bids for some of the world's most coveted media brands and distribution platforms. After all, the Fox movie studio is only fourth in box office receipts in Hollywood and a merger with a larger studio might be the only solution to flat audience growth in the age of Netflix and YouTube. Cord cutting is a fact of life for every major cable network, including Disney's ESPN and CBS' Nickelodeon. Streaming video has devalued the growth potential of both global film and television assets. Disney is also desperate for direct engagement with media consumers, the reason why Bob Iger so covets, say, Sky or the Star TV brand in India.
The grapevine in New York is that Fox wishes to retain its sports and news core, which could be worth at least $27 billion and sell the 39 per cent stake in Sky, the digital streaming Hulu television, cable networks, and, above all, the underperforming $14 billion Hollywood movie studio. In essence, the Murdochs have decided to exit the film/cable business and decided that the British politicians/regulators will not approve their takeover bid for the whole of Sky. The legacy of the 2011 phone hacking scandal in Murdoch clan's London tabloids makes them politically toxic to Prime Minister Theresa May's Conservative Party.
One potential scenario is that the Justice Department blocks AT&T's bid for Time Warner. Donald Trump detests CNN as the embodiment of "fake news", after all. If this happens, Murdoch sons James and Lachlan may covet Time Warner, for whom Rupert Murdoch made an abortive bid three years ago. This is a real life media game of thrones in Tinseltown and Manhattan. What does all this mean for investors?
The big money in Fox shares was made last week. I doubt if Fox shares can rise much above 32. Disney is the world's preeminent content generator and I seriously doubt if Fox's television production or cable network assets (other than Sky and Star) are a value enhancing strategic fit. Television advertising has been gutted by the rise of Google and Facebook. Yet for now, Wall Street will rerate Fox, which can well generate $5 billion in earnings next year.
Rupert Murdoch's control of Fox has been compromised by the arrest of his ally on the board Prince Waleed bin Talal. The Saudi prince's five per cent voting stake helped Murdoch control the Fox board. The Murdoch clan own 14 per cent Fox but control 38 per cent of voting shares. So the news from Saudi Arabia reinforces the odds of a strategic sale of Fox's non-news and sports media brands. Technological revolutions like the Internet and social media have upended the business models of film/television companies and able operators. The sheer scale and power of Netflix, Google, Facebook and Apple means a new wave of mergers and assets sales is inevitable, as the AT&T bid for Time Warner and the Disney-Fox talk attests. Whatever happens, Fox's $28 billion revenue media empire faces potential dismemberment.
The writer is a global equities strategist and fund manager. He can be contacted at mateinKhalid09@gmail.com.