A Sly Move: Bet on Fox
04/25/2003 12:00 am EST
"Recent developments at Fox Entertainment make this is a rather complex situation, and we note that the fundamentals are subject to change. Nevertheless, Tobin Smith, editor of ChangeWave Investing attempts to update his readers on the current situation. According to Tobin, here's a "quick-and-dirty" update...
“Fox
Entertainment Group (FOX NYSE) is
getting dinged in the markets related to the news that Rupert Murdoch's News
Corp. (the parent company of FOX) had won the battle to purchase control over
Hughes Electronics and the DirecTV satellite unit for $6.6 billion. News Corp.
will pay $14 per share for the Hughes stake. The concerns with the deal come
from the way it will be executed. When News Corp. completes the purchase,
ownership of Hughes will be transferred to the Fox group and will add a
significant debt load
(some say as much as $4.5 billion) to the one already being carried by the unit.
After the deal's completion, News Corp. will transfer its 34% ownership stake in
Hughes to Fox for 74.2 million shares and a $4.5 billion promissory
note.
“The
big question: ‘Does owning a controlling interest in DirecTV add to FOX's value
and cash flow or does it destroy value?’ It's too early to definitively tell.
But I can tell you two things for sure. One, DirecTV has been in limbo for three
years and has not done a thing to build on its superior-to-cable TV experience.
That will change BIG time under Fox. Two, video-on-demand, very-high-speed
broadband, a better user experience, AND exclusive sports access will be coming
as soon as possible. FOX received a number of downgrades from analysts today,
and the stock has lost about 17% in the day's trading. A note from a Merrill
Lynch analyst noted that even though the sale might be positive for Fox
strategically, the deal raises concerns that the unit is being used as a
financing vehicle for News Corp. instead of an independent operating
entity.
“Well,
not quite. FOX has a very clean balance sheet and can absorb the additional debt
easily. In essence the question is can FOX add enough new DirecTV viewers and/or
raise the monthly take from subscribers to significantly add to the $2 billion
annual gross of the
company.
It
does not pay to bet against Fox when it comes to programming or marketing.
In
addition, the deal would make News Corp. the only global distributor of
satellite programming when combined with the company's holdings in the United
Kingdom, Italy, Latin America, and Asia. This satellite TV experience could prove
beneficial to the transaction and the operation of DirecTV, along with giving
News Corp.
and Fox the operating leverage over channels that can be valuable in
negotiations with firms that own cable systems and networks like AOL Time
Warner.
“I'll give the benefit of the doubt to FOX and lower the buy
under to $24, but don't be surprised if the stock continues to sell off a little
over the next few days. FOX will sell about $1 billion of other assets (The L.A.
Dodgers, et al) to remove any balance sheet
issues. Post-war ratings will be 20% higher than
pre-war—
and that will add
significant cash flow as well. Not to mention the pay-per-view fees for the
movie studio and TV programming.
I
will report any new news on the deal from Fox officials to you as soon as I get
it.
Further, for full disclosure: I'm a
regular panelist on Fox News Channel's Bulls & Bears during the
cable network's weekend business block. I don't own any stock in the company,
but I am a paid contributing market analyst for the network.”