October 25, 2022

A Case For News Corp Splitting Further, Not Merging

It often feels like the big winners in business are the lawyers and bankers that help with merging and splitting businesses. While once it was part of the same company as Fox Corporation, the two halves were divided in 2013. Well, it seems Rupert Murdoch wants to merge them again.

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Now let’s jump in…


According to a story in The New York Times:

The two parts of Rupert Murdoch’s media business, News Corp and Fox Corporation, are considering a proposal to reunite nearly 10 years after they split up, the companies announced on Friday.

The boards of Fox and News Corp have established committees to evaluate a possible deal, the companies said in statements. The committees have not made a recommendation about whether to combine.

Building on that, The Wall Street Journal reported that:

Both companies could benefit from being bigger, they say. Fox is a slimmer company after selling off major entertainment assets to Walt Disney Co. years ago. News Corp has struggled to lift its stock price, despite making strides in its publishing and digital real-estate units.

The combined company would have more balance sheet strength to pursue acquisitions, people close to the proposed deal said. Some of them said the companies would be on stronger footing to compete for digital-ad dollars, using the scale of their combined properties. Those people also said the companies could join forces in sports-betting, a growing sector where each side has interests.

Both are valid reasons to merge. By being separate, you effectively need two teams to run things, which eats into margins. And it has long been a stance that scale is the only way to compete with platforms, so having some of the largest sites in one company rather than two makes a lot of sense. If the team can unify the user data into a single platform, it’s quite a bit of scale.

Ultimately, whether the two brands merge or not will be contingent on Murdoch’s ability to convince investors to do it. Since he owns 39% of News Corp and 42% of Fox Corp, it won’t take too much convincing.

However, I would argue that what would genuinely unlock value is further splitting News Corp., which is what activist investor Irenic is pushing. According to Axios:

Irenic believes News Corp would be valued higher if its digital real estate practice, which includes a large digital real estate listings business in Australia, was separated from its media business.

Irenic believes that News Corp should be trading at roughly $34 per share, compared to the roughly $15.60 share price it trades at today.

News Corp owns a 61.4% stake in Australia’s REA Group, which is valued at roughly $5.7 billion.

Let’s do some math. If REA Group is worth $5.7 billion, then the rest of News Corp is only worth a little over $4 billion (considering the market cap, according to Google Finance, was $9.84B EOD Monday). But is that a fair valuation for News Corp? It may not even be a fair valuation for Dow Jones on its own, let alone the other media assets.

According to its 2022 Fiscal Report, Dow Jones generated $2.004 billion in revenue and generated EBITDA of $433 million.

Let’s compare that to The New York Times at the end of 2021 (since we’ll be waiting a while for 2022 fiscal numbers). It finished Fiscal 2021 with $2.07 billion in revenue. Its adjusted operating profit was $335.4 million in that same period. So it’ll have a bigger 2022 from a revenue perspective, though operating profits will be lower.

So, if we look at The New York Times, it has a market cap of $4.76B, which we can look at one of two ways. First, it’s a little over 2x revenue. Or, second, it’s trading at 14x adjusted operating profit.

If Dow Jones were to receive the same valuation on $433 million in EBITDA, it would be valued at a little over $6 billion as a stand-alone company.

If you take the $5.7 billion REA Group is worth and add it together with Dow Jones, you’ve got a company worth $11.7 billion—or nearly $2 more than News Corp trades today. And that discounts the following assets:

  • Subscription Video Services, which generated $2.026 billion in revenue and $360 million in EBITDA
  • Book Publishing, which generated $2.191 billion in revenue and $306 million in EBITDA
  • News Media, which generated $2.423 billion in revenue and $217 million in EBITDA

What we have here is a narrative problem. Investors look at News Corp, with its high-quality business publication, legacy book publishing, video assets, and other newspapers, and don’t know how to value it.

This is the downside of these sorts of media conglomerates. For example, is a book publisher’s revenue equal to a subscription video service? Or, is Dow Jones’ revenue similar to News Media, with its more sensational newspaper brands?

And herein lies the problem. When investors are confused, they undervalue an asset. News Corp struggles from this blended revenue scenario where it’s hard to glean where the strengths exist.

So, it’s true that a merger of News Corp and Fox Corporation might unlock some efficiencies of scale. But will it be enough efficiencies of scale?

Suppose we assume that the revenue of the other three divisions—Subscription Video, Book Publishing, and News Media—trades at only 1x (a foolish assumption, mind you). In that case, you’d be talking about an additional ~$6 billion valuation. That takes News Corp to a valuation of ~$17.7 billion. That’s a 57% difference from where it trades today. And this uses the stupid 1x revenue assumption.

I’d be shocked if the merger generated that sort of value creation. And so, if we’re talking about value creation for investors, News Corp should continue splitting rather than merging with its sister.

Peak newsletter

The New York Times did a story on whether or not we were past peak newsletter. I offered my thoughts on the entire ecosystem in the piece, but there’s more worth exploring here.

The problem with “peak newsletter” is that everyone decided to become a creator during the pandemic. However, being a creator is a lot of work. I’ve written a few pieces about creator burnout and growth slowing. And so, people gave up when other priorities took over—otherwise known as the world opening up.

But does that mean we’re at peak newsletter? No, probably not. It may take us more time to reach the level of 2020/21, but if I had to guess, in five years, there would be many more newsletters than there are today. They may not be as big as some heavy players, but they’ll exist.

Ultimately, the reason why is straightforward. By sending a newsletter, the publication of the content is tied directly to its distribution. And that has a lot of value. That’s why AMO will always have email connected to it. How else could I get in front of thousands of people, guaranteed?

In 2023, there will be newsletters that fail and new ones that launch. Just as importantly, current one-person newsletters might turn into multi-person operations. And before you know it, you’ve got another media company.

The newsletter is no longer in the zeitgeist, but it’s still as great as ever. And that’s not going to change any time soon.

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