News Corp’s (NASDAQ:NWS) $2 billion bid for Consolidated Media holdings last week will give the company control of Fox Sports in Australia and 50% ownership of Foxtel, which has near monopoly in the Australian pay-TV market.  The company’s current structure includes Fox Sports in the U.S. and some other countries along with the control of Sky Italia, which is a dominant pay-TV subscription service in Italy. The publishing business is going to separate soon and News Corp will focus entirely on media networks, films and pay-TV services internationally.
The Strategic Advantage Of The Deal
Sports programming is a lucrative business and ESPN represents gold standard in the industry. Despite Disney (NYSE:DIS) being a diversified media giant in terms of businesses it deals in, ESPN alone contributes close to 45% to Disney’s value. This is due to high pay-TV penetration and high fee per subscriber charged by ESPN. Similarly, Fox Sports is critical to News Corp. Just in the U.S. alone, Fox Sports earns approximately $2.5 billion in annual revenues from subscriptions, thus contributing close to 15% to News Corp’s stock.
Therefore, it makes sense for the company to aggressively pursue the sports programming market and getting full control of Fox Sports in the Australian market is the right move. A multitude of international media networks are result of joint ventures between big media companies from the U.S. and local media players. Wherever it makes sense, News Corp will try to convert these joint ventures to full ownerships. Sports programming is one such area given the high fee per subscriber potential and sustained demand among the viewers.
As far as Sky Italia is concerned, the value contribution is low. However Foxtel’s story could be different since the company almost has a near monopoly over the Australian pay-TV market. News Corp could use this to its advantage given that it owns content as well, and continue to maintain that monopoly. It could also push on-demand content from its library and thus charge additional fee from subscribers.
Australian Market Is Small
Even though upscale, the overall market is small in Australia given its low population. The Australian population is less than 10% of the U.S. population and that renders the overall revenue potential a little low in comparison to many other potential markets. Additionally, it is not yet clear whether News Corp will be able to actually acquire Consolidated Media with its bid and it is likely that it may face some challenge from other bidders.
Our current price estimate for News Corp which stands at $26.50, implying a premium of about 10% to the market price.Notes:
- News Corp. Agrees to Buy Consolidated for A$1.9 Billion, Bloomberg, Sept 7 2012 [↩]