Fox/News Corp: merger maths line up for the man in a rush

At 91, Rupert Murdoch’s thirst for blockbuster dealmaking appears to be strong as ever. The media mogul is seeking to reunite the two pieces of his empire, Fox and News Corp. He separated them a decade ago and subsequently vowed he would never reunify them.

But the world has changed. Fox sold much of its film and entertainment business to Disney in 2019, choosing to eschew the internecine streaming wars. Fox then focused on live content in TV sports and news, which it saw as attractive segments of the media business.

With a global economic storm gathering, there is safety in scale again. The Murdoch family knows that News Corp’s print and digital properties are particularly vulnerable due to their reliance on advertising. Time is of the essence because of the patriarch’s advancing age. The financials stack up too.

Fox and News Corp have market capitalisations of $17bn and $9bn respectively. Murdoch is seeking an all-share merger, typically executed with little to no premium. Each set of shareholders would only benefit if cost savings or revenue improvements can be achieved.

Shares in News Corp are down 30 per cent so far in 2022, about double the drop suffered by Fox. The relative value of News Corp shares compared with Fox stock, based on the daily trading prices of each, has drifted down from 0.60 times to 0.49 times from January to today.

News Corp trades at a ratio of about 6.5 times 2023 estimated ebitda to enterprise value, while Fox is just under 6 times. If the pair merged at their market values, Fox shareholders would own two-thirds of the combined company.

Such a split is reasonable or slightly generous to News Corp shareholders, even though the performance of News Corp shares this year has hurt the market-based exchange ratio. Based on the respective contributions of 2023 ebitda the pair might make to the new company, adjusted for net debt of each, Fox shareholders could expect to ask for just a shade above the two-thirds of the equity that the current trading prices imply.

It is a fortunate turn of timing that the empirical and theoretical valuations intersect for a man who is probably in a rush to get things done.