By Sarah Rabil and Joe Flint
By selling the bulk of his entertainment assets to Walt Disney
Co., media titan Rupert Murdoch is making a calculation about
changing winds in the media industry, while doubling down on news
and sports.
21st Century Fox agreed to sell its film and television studio,
international distribution assets and some cable networks to Disney
for $52.4 billion. That leaves the remaining Fox company with
assets including the Fox News and Fox Business cable news networks,
the FS1 cable sports channel, the Big Ten Network and a television
broadcasting business that consists of 28 local TV stations and the
Fox broadcast network, which carries college and professional
football as well as baseball games.
The transaction, announced Thursday, marks the end of an era for
86-year-old billionaire Mr. Murdoch, 21st Century Fox's executive
chairman who built the entertainment business over decades and who
has long been considered a buyer and creator of assets around the
globe.
Wall Street was stunned in recent weeks that Mr. Murdoch would
consider selling a huge chunk of his company to a rival,
particularly after elevating his sons to top leadership roles only
two years ago.
But the Murdochs, who control 39% of 21st Century Fox's voting
shares, have argued that the remaining company will be more nimble
and focused, with must-watch television properties that drive live
viewing as new technologies and changing consumer behaviors are
rapidly shifting the media landscape.
"I know a lot of you are wondering, 'Why are the Murdochs making
such a momentous decision? Are we retreating?' Absolutely not," Mr.
Murdoch said on a call with analysts Thursday. "We are pivoting at
a pivotal moment."
Because 21st Century Fox shareholders will end up owning 25% of
Disney after the all-stock transaction, the Murdochs have
positioned the deal as a way for investors to benefit from Disney's
giant content machine and bolstered efforts to deliver
entertainment direct to consumers.
Shareholders also will remain invested in an entrepreneurial
television company with strong cash flow, they said. 21st Century
Fox shareholders will retain their existing ownership of the
spun-off Fox.
"While the merged business [with Disney] is about scale, the new
Fox is about returning to our roots as a lean, aggressive
challenger brand, focused at the beginning on must-watch news and
live sports," said Lachlan Murdoch, who is executive co-chairman
alongside his father.
The sale to Disney marks a further fragmentation of the Murdoch
media empire 4 1/2 years after News Corp. was split, with
entertainment assets going to 21st Century Fox and newspapers and
book publishing going into a new News Corp, minus the period.
There may now be an opportunity for a future reunion. The
Murdoch family maintained a roughly 39% voting stake in each
company after the 2013 split. People familiar with the matter say
Rupert Murdoch has contemplated eventually merging the remaining
Fox assets with News Corp, which owns The Wall Street Journal,
newspapers in the U.K. and Australia, book publisher HarperCollins
and digital real-estate businesses.
Such a merger is unlikely in the near term given complexities
including how to manage the potential tax bill, the people say.
When asked in an interview Thursday on Fox Business whether he
plans such a recombination, Mr. Murdoch said: "I don't know.
Ideally, yes, but I think that's years away. We'll have to think
about that."
The company, for now being referred to as new "Fox" as it sheds
the Twentieth Century Fox studio from which it derived its name,
will have about $9 billion in debt, $10 billion in annual revenue
and $2.8 billion of earnings before interest, taxes, depreciation
and amortization.
The breakup of 21st Century Fox comes with trade-offs. The new
Fox will primarily draw revenue from fees paid by TV distributors
and advertising sales, leaving it more exposed to the shifting
television landscape where cord-cutting and new streaming
competitors have reduced ratings and pay-TV subscribers.
Also, the Fox broadcast network will be severed from the
Twentieth Century Fox television studio, which produces most of its
shows. Fox, like other networks, has been aggressively trying to
own as much of its content as possible to capitalize on revenue
from reruns, streaming and international sales.
"We can make our own programs," Rupert Murdoch said on the call.
Fox will still buy from Twentieth Century Fox Television, and
independent studios such as Warner Bros. and Sony "will be looking
to us to buy programs," he said.
Fox is holding on to its studio lot in Los Angeles, and its
sound stages could still produce TV shows for other companies,
including streaming players, a person familiar with the situation
said.
The Fox network has been struggling for years. Sports rights
help Fox command significant carriage fees from pay-TV distributors
and its own affiliates, but if its entertainment ratings sink
further, maintaining that leverage could be a challenge.
While the company will still hold lucrative rights to air
National Football League, college football and Major League
Baseball games across Fox broadcast, Fox Sports 1 and the Big Ten
Network, Fox is parting with a portfolio of regional sports
networks that bring in annual Ebitda of $2.3 billion, according to
estimates from MoffettNathanson.
The leadership and management structure of the new Fox is still
being figured out, Lachlan Murdoch said on the call.
Some analysts are predicting the leaner Fox could pursue its own
acquisitions.
After the sale to Disney, Fox will have a balance sheet that is
no longer tied up by the pending purchase of U.K. pay-TV giant Sky
PLC. Meanwhile, the Federal Communications Commission is working to
change the ownership caps on local TV stations that could pave the
way for station owners like Fox to pursue more acquisitions,
according to Brian Wieser, an analyst at Pivotal Research.
The FCC also recently revised longstanding limits on ownership
of TV stations and newspapers, meaning that if Fox recombined with
News Corp, the company may buy more newspapers in the U.S.,
according to Mr. Wieser.
Write to Sarah Rabil at Sarah.Rabil@wsj.com and Joe Flint at
joe.flint@wsj.com
(END) Dow Jones Newswires
December 14, 2017 14:56 ET (19:56 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.