Can News Corp’s Broadcast Deal With NRL Impact Its Valuation?

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News Corp (NASDAQ:NWSA)  announced recently that it in conjunction with its subsidiary Fox Sports Australia it has secured a five year deal with the National Rugby League (NRL) for seasons 2018 to 2022. [1]. For 2016, Fox sports acquired the right to show every game of every round live and ad free and in 2017 Fox Sports plans to launch a dedicated NRL channel.  Signed jointly with Channel Nine and Telstra, the deal was worth $1.3 billion of which News  Corp will pay around $730 million. We expect this deal to improve News Corp’s subscription revenues, however the high cost of acquiring these broadcasting rights might impact margins if the company is unable to pass on these costs to the subscribers.

See our complete analysis for News Corporation

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Higher Subscription Revenues Will Be Key

We believe broadcast rights of the NRL should positively impact revenues of News Corp’s cable network division.  We estimate these revenues to increase from $423 million in 2015 to $470 million by 2022, driven primarily by the popularity of Fox Sports in Australia. With broadcasting rights of the National Rugby League for the next five years under its belt, the company can potentially attract more subscribers and increase its subscription costs thus increasing revenues.  There will be a minor upside in our price estimate, if revenues of the cable network division increase by 10% to around 517 million by 2022.

Margins Can Get Impacted By High Cost Of Rights

We expect the EBITDA margin of News Corp’s cable network division to increase gradually from around 27% in 2015 to 29% by the end of our forecast period (2022) and be comparable with EBITDA margins of other media networks.  The NRL deal value is 70% higher than the last broadcast rights deal. [2]. This is an indication of the increasing competition to gain broadcasting rights and how News Corp is paying a high price to ensure that Fox Sports retains its popularity and competitive edge. In a scenario where News Corp is unable to increase subscription rates to provide for this high cost of broadcasting rights, it might have a negative impact on margins. If margins remain stable at 2015 levels over our forecast period, it will offset the minor upside in our price estimate on account of a 10% increase in subscription revenues.

While the NRL deal is a positive development for News Corp since it will ensure that Fox Sports retains its popularity the valuation impact will be determined by the increase in subscription revenues due to this deal, without impacting the margins.

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Notes:
  1. News Corp Australia announces landmark NRL rights deal, Newscorp Press Release, November 27, 2015 []
  2. NRL secures $1.8 billion rights deal that brings together Telstra, Nine and News Corp, The Australian, November 27, 2015 []