Irenic Sends Letter to News Corp's Special Committee Regarding the Need to Explore Value-Maximizing Alternatives to a Combination with Fox
Irenic Capital Management, L.P. (together with its affiliates, "Irenic" or "we") today announced that it has sent the below letter to the Special Committee of the Board of Directors of News Corporation (NASDAQ: NWSA, NWS) and released a detailed presentation, which can be downloaded above.
This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20221121005319/en/
November 20, 2022
Dear Special Committee Members,
We are writing to you on behalf of Irenic Capital Management, L.P. and its limited partners (together with its affiliates, "Irenic" or "we"). Irenic is one of the largest unaffiliated shareholders of News Corporation ("News Corp" or the "Company"), holding approximately 2% of the Company's Class B voting shares.
We invested in News Corp prior to the disclosure that the Company had received a proposal from Rupert Murdoch and the Murdoch Family Trust to recombine with Fox Corporation ("Fox"). We made our investment because News Corp owns a great - yet disparate - collection of assets that is worth far more than the Company's current trading price of approximately $18 per share. Based on our analysis, News Corp is worth ~$34 per share today.
Still more, we made our investment because we believe a standalone News Corp is likely to compound its value well into the future. News Corp's assets are growing and are well-positioned in their respective industries and geographies. In particular, REA Group Ltd. ("REA"), the dominant real estate listings platform in Australia, and Dow Jones & Company, Inc. ("Dow Jones"), the world's preeminent financial media organization and information service, are extraordinary businesses. We would be happy to own these businesses for a long time, and we believe most News Corp shareholders think the same.
Executive Chairman Rupert Murdoch, Co-Chairman Lachlan Murdoch, CEO Robert Thomson and News Corp's entire leadership team deserve considerable credit for assembling and building the REA and Dow Jones franchises and enhancing the Company's overall operations. Fundamental value has grown substantially during News Corp's independent existence. As Mr. Thomson put it just this August:
"The News Corporation of 9 years ago is not the News Corporation of now. The provenance and the principle endure, but the business is fundamentally transformed. It is vastly more profitable and with the potential for even greater growth […] Almost a decade after our reincarnation, thanks to the efforts of our employees and the faith of our investors, News Corp is set fair for the future."1
News Corp's shareholders have indeed kept faith - for while fundamental value has grown meaningfully, the Company's share price has not kept pace. News Corp has continued to trade at a massive discount to its true fundamental value. As Susan Panuccio, News Corp's Chief Financial Officer, put it this March:
"We still see a significant discount in the sum-of-the-parts, and we still believe that the assets across our portfolio are undervalued, notwithstanding all the work we've done and we've talked about already here."2
In short, News Corp is an extremely well-positioned business whose value is not reflected in its share price. The reason for this gap is no mystery. As Mr. Thomson has made plain: "it's absolutely clear that complexity has been a barrier to investors understanding the true worth of our assets. So simplify it, we must."3
It is in this context - a strong, yet undervalued, and still too complex News Corp - in which the Special Committee must do its work. The Special Committee is tasked with evaluating a proposal from the Company's dominant shareholder, who has economic interests on both sides of its proposed recombination transaction. In fact, this shareholder's economic ownership is weighted more on the side of Fox than on the side of News Corp.4 As a consequence, this shareholder's interests are fundamentally different from the interests of the Company and the independent shareholders to whom you owe your fiduciary duties. Responding to a dominant shareholder puts you in a difficult position. But in such a situation, your charge is clear. Your responsibility is to maximize value for all News Corp shareholders. Delaware has "established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty [to provide] an undivided and unselfish loyalty to the corporation."5 To fulfill this obligation, the Special Committee logically cannot confine itself to the recombination proposal in isolation. Rather, the Special Committee should evaluate all paths to maximizing News Corp's considerable value.
I. OUR CONCERNS WITH THE PROPOSED FOX COMBINATION
In our view, a combination with Fox does not serve News Corp's strategic goals. Over the past five years, management has consistently outlined News Corp's priorities:
Within Digital Real Estate, considerable effort has been made to increase the scope of services provided to the customer (most recently with the acquisition of Mortgage Choice in Australia) and to broaden the firm's geographic scope (e.g., increased investment in India and the transaction with Property Guru). It is hard to understand how any of the Fox businesses (almost entirely U.S. in reach) would increase the likelihood of success in these endeavors. At Dow Jones, Mr. Thomson and Dow Jones CEO Almar Latour have cogently articulated a vision for that business in which Dow Jones broadens its international reach and enhances its "business-to-professional" offerings with increasingly deeper vertical bundles and more "must-have" professional information services. A combination with Fox (with its greater emphasis on broad-based consumer offerings) seems to add little to this effort. Similarly, we can find few benefits for the Book Publishing business. HarperCollins CEO Brian Murray has proven to be an excellent operator and the best way to grow that business is surely through more natural tuck-in acquisitions.6
In years past, News Corp (and Fox) executives have said there are "no obvious synergies" between the two companies.7 And even if such synergies do exist today, they would (i) principally benefit Fox and (ii) reside in the News Media segment of News Corp. For example, Fox Business may benefit from greater integration with The Wall Street Journal and some of Dow Jones' other properties, but it is highly debatable whether the benefits from such an association flow both ways. Parts of the News Media segment, such as the New York Post, and some of the U.K. publications (The Sun, The Times of London) and the nascent TalkTV effort, could benefit from Fox's tutelage and integration with that firm. But News Media is only a small part of News Corp. Surely, there are ways of achieving the benefits of integrating parts of News Media with Fox without a wholesale combination. A joint-venture or even a sale of parts of News Media to Fox would be a far better approach than simply combining the companies.
Moreover, there are substantial risks to a Fox combination that should not be ignored. Fox is subject to litigation that may result in billions in costs.8 Combining with Fox will be both expensive and distracting. Mr. Thomson has previously pointed out the substantial benefits News Corp enjoyed from becoming a smaller, more focused operation after it was spun-off from its parent company.9 The timing is also concerning. We are likely heading into a recession and Fox is a more advertising-dependent operation than News Corp. In the last fiscal year, Fox generated 42% of its revenue from advertising, while News Corp generated 18%.10
Most importantly, a combination with Fox runs counter to the two overarching themes that Mr. Thomson and News Corp executives have said are key to News Corp's future: digitalization and simplification.11 News Corp is much further along in its digital transformation than Fox. Today, 84% of The Wall Street Journal's subscribers are digital.12 By contrast, Fox remains dependent on the cable bundle, which is shrinking, and its streaming efforts, while promising, are early stage. Combining News Corp with Fox will result in a combined company that is obviously more complex than both companies left separate. As independent research firm MoffettNathanson pointed out: "Combining Fox with News Corp's assortment of assets likely won't lead to any reset [in] valuation and will even more likely complicate the narrative for investors."13
II. WE HAVE IDENTIFIED ALTERNATIVE PATHS TO MAXIMIZING VALUE
Irenic believes there are multiple better ways than a recombination to unlock the value that resides within News Corp, while also enhancing the long-term prospects of the Company's underlying businesses.
Importantly, each of these approaches can be structured without upending the existing governance structure. Maximizing News Corp's value does not require depriving the Murdoch Family Trust of its role as the dominant shareholder.
To help the Special Committee comprehensively evaluate all paths to unlocking the substantial value embedded within News Corp, we have prepared a short presentation to accompany this letter. Our presentation details Irenic's analysis of News Corp's fair value - which we believe is ~$34 per share - and outlines multiple better alternatives to a straight combination with Fox. In developing our recommendations, Irenic conducted extensive research and thorough due diligence. We are working closely with multiple operating partners with substantial experience in media and information services. We also have been advised by two globally recognized law firms and a "Big Four" accounting firm.
In closing, we are confident the Special Committee will do its work carefully and with an awareness of its paramount obligations to all News Corp shareholders. As a start, we are pleased that both companies have agreed that "[f]or a combination transaction to proceed, it will need the approval of both special committees and a supportive vote by the majority of the minority nonaffiliated shareholders of each company."16 Before submitting the matter to shareholders, however, the Special Committee must either reach a value-maximizing deal for unaffiliated shareholders or say "no" to any proposal that undervalues the Company. We want to be clear: walking away from a potential transaction is better than agreeing to a deal that fails to maximize News Corp's value. We have no doubt that the majority of News Corp's unaffiliated shareholders, including Irenic, will vote against any deal that undervalues the Company.
III. COLLABORATING WITH THE SPECIAL COMMITTEE
News Corp is an exceptional collection of businesses. The future of those assets is now in your care. We hope this letter and accompanying analysis facilitates productive engagement between the Special Committee and the shareholders that it serves. We request the opportunity to meet with the Special Committee and/or its advisors as soon as possible and will await your response on potential dates.
Thank you for your consideration.
Irenic Capital Management, L.P. is an investment management firm founded by Adam Katz and Andy Dodge. Based in New York City, Irenic works collaboratively with publicly traded companies to ensure operating activities, capital deployment and management incentives are all aligned to create value for the company and its owners. For more information about Irenic, please visit www.irenicmgmt.com.
The views expressed in this letter represent the opinions of Irenic Capital Management, L.P. and certain of the funds and investment vehicles it manages (collectively, "Irenic"), and are based on publicly available information with respect to News Corp (the "Company"). Irenic recognizes that there may be confidential information in the possession of the Company that could lead it to disagree with Irenic's conclusions. Irenic reserves the right to change any of its opinions expressed herein at any time as it deems appropriate and disclaims any obligation to notify the market or any other party of such change. Irenic disclaims any obligation to update the information or opinions contained in this letter.
Certain financial projections and statements made herein have been derived or obtained from filings made with the Securities and Exchange Commission ("SEC") or other regulatory authorities and from other third-party reports. Neither Irenic nor any of its affiliates shall be responsible or have any liability for any misinformation contained in any third-party SEC or other regulatory filing or third-party report. Select figures presented in this letter have not been calculated using generally accepted accounting principles ("GAAP") and have not been audited by independent accountants. Such figures may vary from GAAP accounting in material respects and there can be no assurance that the unrealized values reflected within such materials will be realized. Nothing in this letter is intended to be a prediction of the future trading price or market value of securities of the Company. When used herein, the words "anticipate", "believe", "could", "estimate", "expect", "may", "ought to", "plan", "project", "seek", "should", "will", "would" and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Reliance on any forward-looking statements involves known and unknown risks and uncertainties and there is no assurance or guarantee that actual results or performance of the Company will not differ, and such differences may be material. In addition, there can be no assurance or guarantee with respect to the prices at which any securities of the Company will trade, and such securities may not trade at prices that may be implied herein. The estimates, projections and potential impact of the opportunities identified by Irenic herein are based on assumptions that Irenic believes to be reasonable as of the date of this letter.
This letter is provided merely as information and is not intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy any security. This letter does not recommend the purchase or sale of any security. Funds managed by Irenic currently beneficially own shares of the Company. These funds are in the business of trading - buying and selling- securities and intend to continue trading in the securities of the Company. You should assume such funds will from time to time sell all or a portion of their holdings of the Company in open market transactions or otherwise, buy additional shares (in open market or privately negotiated transactions or otherwise), or trade in options, puts, calls, swaps or other derivative instruments relating to such shares. However, neither Irenic nor any of its affiliates has any intention, either alone or in concert with another person, to acquire or exercise control of the Company or any of its subsidiaries.
1 Robert Thomson, Chief Executive Officer, August 8, 2022, Q4 FY 2022 Earnings Call, (emphasis added).
2 Deutsche Bank Media, Internet & Telecom Conference, March 14, 2022.
3 Goldman Sachs Communacopia Conference, September 17, 2020.
4 Excluding options, Mr. Rupert Murdoch and the Murdoch Family Trust own ~13.9% of News Corp and ~19.7% of Fox. Share counts based on the 10-Qs filed on November 9, 2022 and November 1, 2022, respectively.
5 Weinberger v. UOP, Inc. 457 A.2d 701 (1983) (quoting Guth v. Loft, Inc., Del. Supr., 5 A.2d 503, 510 (1939)).
6 Since 2012, HarperCollins has made 9 acquisitions, most notably HMH Books & Media and Harlequin Enterprises. The integration of these acquisitions has been generally successful. In the past, News Corp executives have discussed additional possible purchases of small, niche publishers and firms that would bolster HarperCollins' presence outside the U.S., U.K. and Australia.
7 At a UBS investor conference on December 4, 2018, Ms. Panuccio paraphrased and expressed her agreement with Mr. Lachlan Murdoch's comments that there were "no obvious synergies" between News Corp and Fox. While things do change in four years' time, we think Mr. Murdoch's observation (echoed by Ms. Panuccio) was right then and remains correct today. See also footnote 11.
8 In early 2021, US Dominion, Inc. and related entities (collectively referred to as "Dominion") brought a defamation claim against Fox News Network, LLC ("Fox News") in Delaware, and Smartmatic USA Corp. and related entities (collectively referred to as "Smartmatic") brought defamation and disparagement claims against Fox News and Fox Corp. (for the purposes of this footnote together with Fox News, "Fox"), among other individual defendants, in New York. See US Dominion, Inc. et al. v. Fox News Network, LLC, Docket No. N21C-03-257 (Del. Super. Ct. Mar. 26, 2021); Smartmatic USA Corp. et al. v. Fox Corp. et al., Index No. 151136/2021 (NY. Sup. Ct. Feb. 4, 2021). Dominion and Smartmatic generally allege that Fox attempted to boost its ratings by fabricating the narrative that their voting machines or voting software caused the election to be stolen from former President Trump. Dominion and Smartmatic are requesting relief in excess of $4 billion, and each of the cases has survived the motion to dismiss stage and has proceeded to discovery. To be clear, Irenic has no opinion on the merits of these claims but believes that the Special Committee must incorporate a risk-weighted calculation of these liabilities in assessing Fox's value, as well as consider the potential broader risks to the business from an adverse judgment.
9 Discussing REA's successful integration with Realtor, Mr. Thomson said, "frankly, that was one of the visions that Rupert had of News Corp when we were spun off, that the focus that you would be able to get by being part of a smaller company would enable these kinds of conversations to take place, the sharing of expertise and the elevation of outlook and that's what taking place." UBS Global Media and Communications Conference, December 5, 2017.
10 Source: Company filings, as of YE FY2022 dated June 30, 2022.
11 Fox executives have also extolled the benefits of simplification. At Fox's Investor Day on May 9, 2019, Mr. Lachlan Murdoch said: "…Fox is a focused company and we don't get distracted by ideas that are not correlated to our core businesses or strategic direction. Our 2013 spin out of News Corporation was about achieving better focus on complementary businesses as both 21 Century Fox and News Corporation. Our Fox spin has refined that focus even further. I can see no logic in reversing the benefits of those defining actions. That is one reason we chose not reacquire our regional sports networks from Disney. It is also the reason why we will not reunite with News Corporation." (Emphasis added).
12 Source: Company filings, as of Q1 FY2023 dated September 30, 2022.
13 FOXA: Does Size Really Matter?, MoffettNathanson, November 1, 2022.
14 It is important to note that a tax-free separation of Digital Real Estate could be accomplished simultaneously with any recombination transaction for the rest of News Corp. While a simultaneous set of transactions is not our preferred approach (we'd rather the remaining News Corp trade for some period to establish its market value), because of the overlapping shareholder bases at News Corp and Fox, the tax-free aspect of a separation is unlikely to be affected by a merger between News Corp and Fox. See cf. Regal Beloit and Rexnord.
15 Goldman Sachs Communacopia Conference, September 17, 2020. At that conference, Mr. Thomson said: "We obviously believe the full value of our Digital Real Estate properties is not reflected in our share price. It just - it doesn't take much effort [to] do that math when you look at the value of our holding." He added further that appointing a head of global digital real estate was "the start of the process, not the end" of "actively looking at maximizing the value of those [digital real estate] holdings."
16 Fox Annual General Meeting on November 3, 2022; this was confirmed in the News Corporation 8-K dated November 8, 2022.
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