With a failed bid for Time Warner (NYSE: TWX) now officially behind it, 21st Century Fox (NASDAQ: FOXA) is moving forward with ambitious plans for fiscal 2015. What's planned, and how might investors following Fox think about the business? Here's what management had to say in the most recent earnings conference call.
Fox is "resolute" about walking away from its bid for Time Warner
At $80 billion and $85 a share, Fox was offering a 20% premium to what Warner was trading for at the time. The combination would have created the world's largest integrated media company with the ability to take on not only Walt Disney (NYSE:DIS) but also Comcast.
Having been refused by Time Warner's management and board to engage with us, to explore this compelling offer, coupled with the reaction in our share price that undervalued our stock, resulted in our conclusion that this transaction was no longer attractive to Fox shareholders. As you know, yesterday, we walked away. This is our resolute decision, which is why we formally withdrew our acquisition offer.
Fox stock is up about 15% since CEO Rupert Murdoch declared the Warner deal dead.
A similar bid for a different studio probably isn't in the works
When Fox announced its bid for Warner, pundits presumed it would be the first of many attempts to add to Fox's media portfolio. Fox President and Chief Operating Officer Chase Carey disabused analysts of that notion during the call.
We have no plans to pursue any other third-party content company as an alternative to Time Warner. We have created shareholder value at Fox by being an industry leader in building businesses, realigning franchises and establishing leadership positions in brands and content around the world.
Markets other than the U.S. and Canada accounted for 44% of revenue in fiscal 2014.
The stock is cheap
Rather than targeting another media company, Murdoch told analysts that he'd rather bet on Fox's own stock.
We are committed to delivering value for our shareholders, not only through earnings growth, but also through robust capital returns. In that regard, yesterday, our board authorized a new $6 billion share buyback program. It is effective immediately and will be completed within 12 months, just as we have completed the $4 billion share buyback program authorized last August. We believe buying our own stock, when it is underpriced, represents a unique opportunity to maximize shareholder value over the long term. And at these levels, we believe our stock is severely undervalued.
The move comes at an interesting time. Fox stock has underperformed the market by about four percentage points year-to-date and, at 21.5 times earnings, trades for a similar premium to Disney stock. Analysts are expecting earnings to grow by 20% annually over the next three to five years. (Source: S&P Capital IQ.)
Digital isn't killing the TV advertising market; the economy is
Television is a big part of Fox's business. As a result, ad sales at the annual "upfronts" help the company forecast profits. Generally, the television industry's annual upfront meetings take place the third week of May, at the end of the current broadcast TV season and amid the final "sweeps" for calculating full-year ratings. According to Carey, Madison Avenue's big buyers weren't in a spending mood this time around. What held them back? The economy, Carey said.
Business at the recently completed upfronts would best be described as cautious. We hit our targets in terms of pricing, but overall, volume was down. Many have asked to what extent this result was driven by advertising moving to digital platforms. Now clearly, digital ad spend is growing, particularly in mobile platforms. However, television effectiveness is standing up pretty well to the competition. The primary factor leading to lower upfront volume was the lackluster economy ...
Maybe so, but there's also evidence that online video is surprisingly effective when it comes to engaging viewers. Most of us spend just six hours per month watching online, versus 146 hours of television. According to AdWeek, that still results in $3.5 billion in annual revenue.
News and sports are still the keys to the company
20th Century Fox might be the biggest name in Fox's lineup, but it's the everyday cable business that drives profits, CFO John Nallen said during the call.
The overall growth in fiscal '15 will be driven by our Cable segment, which, excluding our [direct broadcast satellite] businesses, represented 70% of our EBITDA [earnings before interest, taxes, depreciation, and amortization] this past year. This segment is forecasted to post high single to low double-digit EBITDA growth in fiscal 2015, led by contributions at the [regional sports networks], Fox News, and [Fox International Channels].
And if Fox misses the target? Blame sports. Additional investments at existing and acquired networks will boost expenses in the coming year.
As we indicated a year ago during our Investor Day, our growth in fiscal 2015 will be affected by the continuation of several strategic initiatives, most notably, the continued planned investments into our new sports and entertainment networks here in the U.S. and internationally, particularly in India.