The main Murdoch family company, 21st Century Fox is no longer a popular way for foreign investors to play the US media sector. It is increasingly inward looking, its most profitable business is the rightwing Fox News Channel, it seems the company’s prospects don’t appeal as much to foreigners and the 4th quarter and 2015-16 financial results didn’t set the world on fire.
In fact the Murdochs and the board emphasised that Fox is very much ex growth by revealing another multi billion dollar share buyback and boosting dividend. Those are not the moves of a growth stock. It is mature and a cash flow generator, while the real growth stocks remain the likes of Facebook, Amazon, Alphabet and even Microsoft.
In a week where the company’s 4th quarter and full year results confirmed that growth was stalling, the board quietly recognised that it is no longer attracting foreign investment by dropping the four year plus part suspension of voting rights on its B class shares held by foreign shareholders.
The suspension started in April 2015 when the company found that more than 25% of its shares were held by foreigners, a situation that put it in contravention of the US law that restricts foreign ownership of US TV assets to a maximum of 25%.
Fox owns broadcast station licensees covering 28 US television stations which form the backbone of its Fox free to air TV network (a business that has been relegated by the continuing success of the cable operation, especially Fox News Channel).
Fox halved the voting rights to 50% of the holding of the voting shares and froze the family’s holding as well so that it wouldn’t be accused of a takeover by stealth.
The Fox board voted on Tuesday to end the suspension. Fox didn’t disclose what the level of foreign ownership of the company’s voting shares had fallen to.
The Murdochs control Fox via their 38% holding of the voting shares. In April 2012, when the suspension started,around 36% of the B class shares were owned by foreigners. That included key Murdoch backer Prince al-Waleed bin Talal, whose voting rights were cut from 7% to 3.5%, as well as all Australian, British and other holders of class-B shares.
The reason for the decision is that many foreign shareholders have sold their shares and departed. In many respects it has left the company and the Murdochs more exposed to activist shareholders, such as one of their biggest holders, ValueAct, (owns 5.9% of the voting shares) whose principal is now a board member at Fox.
The quiet announcement Friday morning now means Prince al-Waleed can vote his stake in full. Perhaps there might be a nasty motion or two at the company’s annual meeting later this year from restive shareholders.
There are a couple of activist shareholders in Fox and they will no doubt be feeling the 17% slide in the company’s shares in the past year, including a 4% drop overnight Thursday as investors gave the 4th quarter and full year results the thumbs down.
In fact, 21st century Fox’s quarterly and full year figures underlined a key point of concern of some analysts – that Fox’s cable news and entertainment operations (Fox News, Fox Business, Fx, Fox Sports etc) now completely dominate the company’s revenue and earnings to the point where the other businesses – Fox TV, the film operations and investment in the European satellite TV operations on Sky, are immaterial to the current value of Fox and the Murdoch family’s fortune.
The results filing reveals that in the year to June, the cable networks accounted for 55% of group revenues for the year of $US27.23 billion, and a massive 78% of group operating income before depreciation and amortisation (the Murdoch’s preferred profit measure) of $US6.597 million – that was up from 51% of revenue and 72% of operating profit in 2014-15.
But for the June quarter, the dependence of Fox on the cable business was even higher – it accounted for 59% of group revenue (57% in the final quarter of 2014-15) and a massive 83% ($US1.214 billion) of group operating profit of $US1.451 billion – against 78% in the June quarter of the previous year.
For that Murdochs can thank Donald Trump and Fox News host Megyn Kelly (and Roger Ailes) for their battles from late 2015 through to June this year which raised the ratings, revenue and profits of Fox News above their already very high levels.
The next two quarters will see that boost continue,even though Fox will battle because of the way its favoured candidate, Donald Trump, is imploding. While Fox News dominated the TV ratings for the week of the Republican Convention last month, it was well beaten by CNN in the week of the Democrat Convention.
Fox News is the core of the group’s cable business and their huge earnings it delivers. US research firm SNL Kagan, estimates that the channel produced profits of $US1.5 billion, or 30% of group operating profit last year.
The Murdoch sons did not update investors on the investigation into the allegations against Mr Ailes, but it is clear the pro Republican (Donald Trump) political stance won’t change quickly (because Dad Rupert is in charge for the time being?). But should Fox News stumble in the next year or so, the impact on the company share price, and the Murdoch fortune, would be highly damaging.
But it is now clear that to protect the earnings and profits in Fox News (and the rest of the cable business) from any lingering damage from the sexual harassment claims against Ailes, the man who created the earnings monster at Fox News, had to walk the plank, assisted by a $US40 million departure payout.
Given the utter dependence of the Fox balance sheet (and the Murdoch fortune) on Fox News and other the other cable businesses, it was a cheap deal and a no-brainer of a decision.
But Fox’s board and the Murdochs must be worried about the outlook – the company lifted its half yearly dividend to 18 US cents from 15 US cents (which is a boost to the annual income for the battling Murdoch clan, of course with their 14% stake in the company) and announced plans to repurchase an additional $US3 billion of its Class A stock. That was after buying back $US4.9 billion of the same shares in 2015-16.
