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NewsCorp Expanding Its B2B Operation

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NewsCorp announced on Monday that it had decided to lend a helping hand to S&P Global and IHS Markit by acquiring the Oil Price Information Services (OPIS) business. In the announcement:

OPIS has a revenue base that is nearly 100% digital, 95% recurring and operates at approximately 50+% Adjusted EBITDA margins, with modest Capex requirements.

News Corp is acquiring OPIS for $1.150 billion in a cash transaction, subject to customary adjustments, and also expects to receive an estimated tax benefit of $180 million as part of the transaction.

So, why do I say that NewsCorp is lending a helping hand to S&P Global and IHS Markit?

In November 2020, the two companies announced they would be merging, valuing IHS Markit with an enterprise value of $44 billion (inclusive of $4.8 billion of net debt). However, fast forward to May and the two companies announced that they needed to divest OPIS, along with IHS Markit's Coal, Metals and Mining businesses, as a way of appeasing regulators.

What's remarkable with this deal is that it appears to be a seller's market rather than NewsCorp getting a deal for stepping in. NewsCorp is paying nearly 19x adjusted EBITDA (before we take into consideration the $180 million tax benefit). On a revenue basis, it's approximately 10x revenue.

Suffice it to say, this is quite the pricy deal. At this scale, I'm unsure why NewsCorp paid as much as it did. I have a couple of theories here. The first is that it's a stable business and margins are just too strong to pass up. Even if we know that its non-adjusted EBITDA margins are lower, the fact that this business is nearly flawless from a renewals perspective is a great sign.

My suspicion, though, is that the real reason for this deal is it believes there are opportunities for Dow Jones Professional Information Business to grow even faster because of this large addition. Clients might be likely to upgrade to gain additional access.

If we dig into NewsCorp's Q3 results, we can see that for the nine months ended March 31, the Professional Information Business generated $355 million in revenue, only up 5% year-over-year. NewsCorp reports that OPIS has grown by a CAGR of 10% since 2016, so adding this could add a little boost to the segment's revenue.

As with any deal, there are often things that management sees that we, on the outside, don't have access to. Nevertheless, it is a great deal for S&P Global and IHS Markit, especially if it helps them with their proposed merger.

But what comes next?

Presently, OPIS is focused primarily on oil markets. There are arguments to suggest that we have reached peak oil and that the "best years" are behind us. According to Yale Environment 360:

On that day, May 26, three events occurred that would have seemed nearly impossible not long ago: activists angry at ExxonMobil’s climate policies won three seats on its board of directors; Chevron shareholders voted to force the company to start cutting emissions; and a judge in the Netherlands ruled that Shell must slash its emissions by 45 percent by 2030.

The moment when the century-long advance in global consumption of oil ceased has been predicted by industry analysts for a while now. But their trend graphs always suggested peak oil would not happen until the 2030s or beyond. No longer. The coronavirus pandemic drove a 9 percent slump in oil demand in 2020 that many economists think will never be recouped.

I'm not an oil analyst (I'd probably need access to OPIS to make smart predictions), but it does appear that there is a seismic shift in how oil companies are being treated. If there is a legitimate slump in oil demand and the largest oil companies are being forced to cut emissions, I can't help but feel like oil has started to move ever so slightly into the rearview mirror.

I mention this because it does mean OPIS will need to evolve its business and focus on more than carbon-based sources of energy. In the press release, NewsCorp said:

Given the large scale and global corporate and societal response to climate change, the fast-growing renewable energy markets have rising demand for the kind of data and analytics Dow Jones will be able to supply with OPIS. OPIS’ retail offerings have the ability to grow outside the US and in segments like connected cars and electric vehicles.

I think this is an important step for the business. It's not an existential crisis today, but for an expensive acquisition of 18x adjusted EBITDA, it needs to think about what the next 10-15 years look like for this asset class. By the time we return to this in 2030, the oil market will be in a very different position and if OPIS hasn't made that investment, it likely won't be generating as much revenue.

The Dow Jones brand is strong and there is a real opportunity for it to lean more into that business. While 5% revenue growth isn't terribly exciting, these businesses are incredibly stable and the revenue is predictable. I would be surprised if NewsCorp didn't make additional deals in this area in the coming years.

As part of its proposed merger, BuzzFeed and 890 5th Avenue Partners released its Form S-4, which shares how the company performed in Q1. Public company disclosure requirements can be so exciting.

Q1 revenue grew from $63.88 million to $72.65 million, a growth of just about 14% year-over-year. In its SPAC presentation, it proposed revenue growth of 25% in 2021, but it's only the first quarter and only accounted for 20% of 2020's revenue.

The breakdown of revenue was interesting. $38.6 million came from advertising, which was up 23% year-over-year. An additional $14.5 million came from commerce and others, which was up 78% year-over-year. However, content revenue was down from $24.4 million to $19.5 million, a drop of 20%. That content revenue is interesting because it accounts for 27% of revenue compared to 38% last year.

Why is this important?

One of the key financial themes for BuzzFeed was its diversification away from content revenue to more money in commerce. By 2024, it was projecting that 25% would come from content—not too far off from the 27% in Q1. However, this is not the right way to diversify revenue sources. In this case, revenue dropped. Ideally, all revenue sources would have grown, but advertising and commerce would grow much faster than content, allowing the diversification to occur in a positive way.

Nevertheless, the business grew its revenue quite significantly year-over-year, which is a stark break from where the business has been over the past few years. But it's still not making much actual money.

In Q1, it had a net loss of $11.3 million. However, its adjusted EBITDA was a loss of $4.3 million, an improvement from a loss of $9.3 million in 2020. In the SPAC presentation, it suggested that BuzzFeed would generate $55 million in adjusted EBITDA. It'll have to make up the $59.3 million over the next three quarters.

Complex is in a less than stellar position. According to a press release announcing the results:

In the first quarter of 2021, revenues at Complex Networks fell 14% year-over-year, as the revenue was impacted by the winding down of the go90 partnership, which is expected to be completed by the end of the year. Excluding the revenue attributable to the go90 partnership from the 2020 period, revenues would have grown 4%:

The good news for this merger is that the go90 partnership will officially wind down around the same time as the two businesses merge, which should make it a cleaner comparison.

Here are my thoughts on BuzzFeed's earnings... It's only one quarter. It would be unfair of me to be critical of revenue only growing 14% year-over-year when it's promised 25% in 2021. Additionally, it might be a business that generates much of its EBITDA in quarters 2, 3, and 4, which explains the loss. Nevertheless, every media company I talk to is seeing incredible growth. And while 14% is not something to sneeze at, I've heard of other companies of similar sizes growing faster.

The good news is that the company is improving its financials. While there is no way in a million years I am touching this at a $1.5 billion valuation, it could be a lot worse. Its pivot to focus more on commerce rather than the content revenue it is notorious for is a good move. If it can build a more robust IP operation—learning from Complex here, I would imagine—then things might start to speed up.

But the facts remain... Its presentation, which proposes 25% year-over-year revenue growth, expects absolute perfection. I know few media companies that can achieve perfection ever. I remain incredibly skeptical.

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