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8/13/2019 2014.02 News Corp Investment Idea
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A Current Investment Idea
News Corp
February 2014
8/13/2019 2014.02 News Corp Investment Idea
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1
News Corporation (NWSA)
Twenty First Century Fox (formerly News Corp) spun off itsassets into new News Corp in June 2013
Globally diversified media and information services company
Owns leading news publishing brands (i.e. WSJ, Barrons, Sunday Times, etc)
Second largest english publishing companyHarper Collins
Leader in Australian sports programming channel and TV subscription provider
Strong AU real estate website
Capitalization
Enterprise Value: $6.4 billion
Equity Market Value: $9.0 billion
Operating Statistics (2)
2013 Revenues: $9.0 billion 2013 EBITDA: $688 million
Ticker: NWSA
Stock price: $15.52 (1)
(1) All financials in this presentation are as of 2/4/14 with closing share price of $15.52 and diluted shares outstanding of 578.8mm(2) Fiscal Year ends June 30
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Premium Content and Iconic BrandsNWSA Overview
Source: Company documents
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4
News Corps Discount to NAV Is Significant
$3,217
$973
$3,552
$3,728
$1,386
$234$715
$1,331$270
$13,436
$4,452
$8,984
$0
$4,000
$8,000
$12,000
$16,000
News Publishing REA Foxtel Fox Sports Amplify Corp. OH Net Cash Pension Def. NAV Discount Market Value
$ in millions
Net Asset Build
~50%discount
REA investment based on market value
Corp Overhead excludes Amplifys loss of operating
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5
News Corps Discount to NAV Is Significant Contd
$3,217
$973
$1,884
$3,728
$1,386
$234$715 $1,331 $270
$11,768
$2,784
$8,984
$0
$4,000
$8,000
$12,000
$16,000
News Publishing REA Foxtel Fox Sports Amplify Corp. OH Net Cash Pension Def. NAV Discount Market Value
$ in millions
Net Asset Build (1)
~30%discount
(1) REA valued through comparable versus NWSAs market value of its ownership in the public company; Corp Overhead strips outAmplifysloss of operating
REA based on public trading comps
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Factors and Drivers Behind ValueSegment Analysis
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(1) News, Publishing, and Digital Real Estate
$ in millions
Net Asset Build
$3,217
$973
$3,552
$3,728
$1,386
$234$715
$1,331$270
$13,436
$4,452
$8,984
$0
$4,000
$8,000
$12,000
$16,000
News Publishing REA Foxtel Fox Sports Amplify Corp. OH Net Cash Pension Def. NAV Discount Market Value
~50%discount
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News and Information Services
Third largest newspaper publisher in the world(1)
#1 newspaper in the US, AU, and UK market
Globally diversified with top brands
Dow Jones products cater to consumers and institutions
WSJ, Newswires, Factiva, Barrons, MarketWatch, and
SmartMoney
UK presence through the Sun and The Sunday Times
Generated $6.7 billion through print/digital advertisingand subscription based model for FY13
~60% of revenues come from advertising with the rest fromsubscription
Greater than 70% of total consolidated revenues
(1) "Top Newspaper Publishers, 2009." Market Share Reporter. Ed. Robert S. Lazich and Virgil L. Burton, III. 2012 ed. Detroit: Gale, 2012. Business Insights: Essentials. Web. 7Feb. 2014.
Strengths
Secular declining industry
Negative 5.7% revenue CAGR from 2011-2013
Negative 2.0% EBITDA margin compression during same timeperiod
The proliferation of internet has decreased readership amountyoung people
UK hacking scandal litigation erode valuation
Variant perception
51% of adult Americans still read a newspaper (43.4mm papersevery weekday and approximately 48mm on weekends )
Though in slow decline, I believe industry will not die but evolvewith technology (i.e. IPAD newspaper, digital locker, etc)
UK Scandal being indemnified by 21stCentury Fox noted in their10K filing
Concerns
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Operationally weak, and believe it will continue to do soNews and Information Services
$7,576$7,058
$6,731$6,363
$1,153 $939 $795 $643
0%
4%
8%
12%
16%
$0
$2,000
$4,000
$6,000
$8,000
2011 A 2012 A 2013 A 2014 E
Revenue - LHS EBITDA - LHS EBITDA Margin - RHS
Source: Company Documents, Capital IQ, and my estimates
News & Information Services 2011 2012 2013 2014E 11-'13 CAGR
Advertising $4,694 $4,388 $3,938 $3,607Circulation 2,522 2,326 2,370 2,297
Other 360 344 423 459
Revenue 7,576 7,058 6,731 6,363 (5.7%)
Operating Expense (4,294) (4,195) (4,099) (4,002)
Gross Profit $3,282 $2,863 $2,632 $2,361 (10.4%)
Margin% 43.3% 40.6% 39.1% 37.1%
Gross Profit $3,282 $2,863 $2,632 $2,361
SG&A (2,129) (1,924) (1,837) (1,717)
EBITDA $1,153 $939 $795 643 (17.0%)Margin% 15.2% 13.3% 11.8% 10.1%
$ in millions
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Estimate the News Segment Is Worth Over $3bn
10 yr avg: 7.3x
5-yr avg: 5.5x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
2004 2006 2008 2010 2012
* As of 2/4/14
EV/EBITDA Historical Trend of Public Trading Comps
Source: Company Documents, Capital IQ, and my estimates
Use 5.0x multiple which is near 5-year average(vs. current 7.4x) to reflect declining secular trends
News and Info Services Low Mid High
2014E EBITDA $643 $643 $643
(x) Multiple 4.0x 5.0x 6.0x
EV $2,573 $3,217 $3,860
Per Share $4.45 $5.56 $6.67
$ in millions
$ in millions
Company Share Price Market Revenue EBITDA Margin EV/EBITDA
Gannett Co., Inc. $26.36 $6,007 $5,161 $1,045 20.2% 7.4x
New York Times $13.75 $2,059 $1,491 $252 16.9% 8.2x
McClatchy Company $4.36 $376 $1,223 $289 23.6% 6.5x
Average 20.3% 7.4x
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Publishing SegmentHarper Collins
Second largest english publisher company
Harper collins carries some great brands with and authors with greatest number of titles on NY times best seller
100,000 active names in print and e-book Over 200 best sellers each year
Unlike the newspaper business, global market for books is growing with stable revenues
Digital e-books contribute more than 20% of revenues and it expected to grow
E-books have better economics than print
E-Book Contribution is GrowingMajor Title / Names
2.0% 3.0% 6.0% 10.0% 14.0% 18.0% 23.0% 28.0%
2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E
Print Ebook
Source: Company Investor Presentation, May 2013
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Book Publishing 2011 2012 2013 2014E 11-'13 CAGR
Consumer $1,124 $1,123 $1,286 $1,376
Other 66 66 83 $93
Total revenues 1,190 1,189 1,369 1,469 7.3%
Opex (906.0) (886.0) (1,028.0) (1,105)
Gross Profit 284 303 341 364 9.6%
Margin% 23.9% 25.5% 24.9% 24.8%
Gross Profit 284 303 341 364
SG&A (196) (217) (199) (201)
EBITDA 88.0 86.0 142.0 162.2Margin% 7.8% 7.7% 11.0% 11.0%
Segment Has Stable Revenues But Growing Margins
The penetration of E-books improves publishers
economics
Source: Company filings and my estimates
$ in millions
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Estimate the Publishing Segment Is Worth $970mm
* As of 2/4/14
EV/EBITDA Historical Trend of Public Trading Comps
Source: Company Documents, Capital IQ, and my estimates
Use 6.0x multiple as Scholastic is a close comp
10 yr avg: 9.3x
5-yr avg: 8.4x
0.0x
3.0x
6.0x
9.0x
12.0x
15.0x
2004 2006 2008 2010 2012
Select Peers' Average 10 yr avg 5 yr avg
Bookpublishing Low Mid High
2014E EBITDA $162 $162 $162
(x) Multiple 5.0x 6.0x 7.0x
EV $811 $973 $1,135
Per Share $1.40 $1.68 $1.96
$ in millions
Company Share Price Market Revenue EBITDA Margin EV/EBITDA
Scholastic Corp $31.98 $1,017 $1,785 $165 9.3% 5.9x
Pearson 10.88 8,801 5,160 880 17.1% 12.5x
Average 13.2% 9.2x
$ in millions
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Digital Real Estate Services
NWSA owns 61.6% of REA Group Limited
Publicly traded company on the ASX (ASX: REA)
$5.8bn market cap
Provides largest AU residential property website
Online advertising services for residential and commercial properties for sale and rent
Online display advertising space for advertisers in various industries
Source: Company Investor Presentation, May 2013
$235
$286
$345
$418
$102$129
$168 $191
40.0%
42.0%
44.0%
46.0%
48.0%
50.0%
$0
$100
$200
$300
$400
$500
2011 2012 2013 2014E
Revenues - LHS EBITDA - LHS Margin% - RHS
Leads to Strong Revenue and EBITDA TrendsREAs Offerings & Competitive Position
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Two Different Approaches to Value This BusinessValuation
Market Valuation
REA AU Market Value
Shares (mm) 131.7
(x) Share Price $43.78
(x) Avg. Exchange Rate $1.00
Market Valuation $5,766
(x) NWSA Ownership 61.6%
NWSA Value of REA $3,552
Per Share $6.14
Comps Method
Due to Trulia and Zillow lack of history, usinginternet software services average multiple
Internet Software and Services 2010 2011 2012 2013 Feb-14
TEV/Total Revenue 4.8x 4.0x 4.3x 6.4x 5.9x
TEV/EBITDA 15.2x 12.7x 14.3x 19.7x 19.9x
2010 - 2014 Average 16.4x
Source: CapitalIQ
REA AU Low Mid High
2014E EBITDA $118 $118 $118
(x) Multiple 15.0x 16.0x 17.0x
EV $1,767 $1,884 $2,002Per Share $3.05 $3.26 $3.46
Currently, the market is valuing NWSA equitystake in REA at $3.5 billion
However, the market is potentiallyovervaluing the equity because its intrinsic
value is closer to $1.8 billion today.
Source: Company Documents, Capital IQ, and my estimatesREAs EBITDA is $118mm ($191mm 2014E times NWSA REA Share (61.6%)
$ in millions, unless stated otherwise
$ in millions, unless stated otherwise
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NWSA Valuation Build-Up
(1) NWSA stated in Investor Presentation (May 2013) Foxtel debt was $2.1B. NWSA share is 50% of it(2) Corp overhead estimated to be 143m of pre-tax expenses per year, capitalized at 5x
Base Case (Mid)
Low Mid High per shareBusiness Segments Discussed
News and Info Services $2,573 $3,217 $3,860 $5.56
Publishing 811 973 1,135 $1.68
Digital Real Estate Services (REA) - Market 3,552 3,552 3,552 $6.14
Other Business Segments
Foxtel $0.00
Fox Sports $0.00
Amplify $0.00
Cash $2,381 $2,381 $2,381 $4.11
Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)
Net Cash Equivalent $1,331 $1,331 $1,331 $2.30
Less: Corp Overhead (2) ($715) ($715) ($715) ($1.24)
Less: Unfunded Pension Obligation (270) (270) (270) ($0.47)
Equity Value - REA Market $7,282 $8,088 $8,893
Share Price $12.58 $13.97 $15.37 $13.97
Current Stock Price $15.52 $15.52 $15.52
% Prem ium / (Discount) to Curren t (18.9%) (10.0%) (1.0%) (10.0%)
$ in millions, unless stated otherwise
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(2) Foxtel & Fox Sports
$ in millions
Net Asset Build
$3,217
$973
$3,552
$3,728
$1,386
$234$715
$1,331$270
$13,436
$4,452
$8,984
$0
$4,000
$8,000
$12,000
$16,000
News Publishing REA Foxtel Fox Sports Amplify Corp. OH Net Cash Pension Def. NAV Discount Market Value
~50%discount
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Foxtel
Largest pay TV Provider in Australia
Over 2.3 subscribing households, equivalent to 30% of the population in Australia
Deliver more than 200 channels including premium sports and content from Fox Sports Australia
Exlusive broadcast rights for Fox Sports relationship and HBO positions Foxtel well
HBO has orginal content, like Game of Thrones, which is considered to be must have programming
Exlusive contracts for rugby, soccer, and australian Football, ranging until 2015 - 2017
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Used when investor has no control butsignificant influence
Proportionate share of earnings or loss flowthrough the income statements as a one lineconsol idat ion i tem below net income
Effects of Equity Method Accounting
Source: The Practioners Guide to Investment Banking
NWSA earnings understated if only looking at EBITDA. Therefore, need toinclude Foxtel value in the sum-of-the- parts analysis
Equity Method Accounting Understates Foxtel Value
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Estimate the NWSA Share of Foxtel Is Worth $3.7Bn
* As of 2/4/14
Source: Company Documents, Capital IQ, and my estimates
Pubic Trading Comps
Foxtel Low Mid High
2014E EBITDA $932 $932 $932
(x) Multiple 7.0x 8.0x 9.0x
EV $6,524 $7,456 $8,388
(x) NWSA Share 50.0% 50.0% 50.0%
EV $3,262 $3,728 $4,194
Per Share $5.64 $6.44 $7.25
Company Share Price Market Revenue EBITDA Margin EV/EBITDATime Warner Cable $135.90 $37,767 $22,120 $7,980 36.1% 7.8x
Comcast $53.52 $139,014 $64,657 $21,434 33.2% 8.7x
Direct TV $68.81 $36,156 $31,214 $7,731 24.8% 7.1x
Cable Vision $16.39 $4,386 $6,738 $1,708 25.3% 7.9x
Average 31.3% 7.9x
$ in millions, unless stated otherwise
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Leading sports programming provider and haveexlusive rights to many popular sports
Generates revenue primarily through affiliate feespayable under these carriage agreements, as well asadvertising sales
Majority of Foxtel household subscribe to Fox Sports
Foxtel and Fox Sports relationship are symbiotic asthey both need each other (i.e. good synergies)
Subscribers want access to original content and live sports
Increases stickiness and adoption, which leads to lowerchurn rates and higher ARPU
Fox Sports needs a distribution network, and Foxtel catersto 30% of Australia
Fox Sports
Source: Company Documents
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Having exclusive rights to original content and live events is key to
keeping subscribers and maintaining competitive position
Sports Is A Key Attraction For Cable TV Subscribers(1)
Portfolio of Major Sports Rights
Source: Company Documents,
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Estimate Fox Sports Is Worth Close to $1.4bn
* As of 2/4/14
EV/EBITDA Historical Trend of Public Trading Comps
Source: Company Documents, Capital IQ, and my estimates
Use a 11x vs. 5-yr average of 11.6x forconservatism
$ in millions
$ in millions
5 yr avg: 11.6x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
2008 2010 2012
Company Share Price Market Revenue EBITDA Margin EV/EBITDA
Discovery Communication $78.03 $27,067 $4,941 $2,184 44.2% 15.8x
AMC Networks $62.70 $4,532 $1,523 $520 34.2% 12.1x
Starz $27.04 $3,056 $1,785 $443 24.8% 9.7x
Average 34.4% 12.5x
Fox Sports Low Mid High
2014E EBITDA $126 $126 $126
(x) Multiple 10.0x 11.0x 12.0x
EV $1,260 $1,386 $1,512
Per Share $2.18 $2.39 $2.61
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25
NWSA Valuation Build-Up
(1) NWSA stated in Investor Presentation (May 2013) Foxtel debt was $2.1B. NWSA share is 50% of it(2) Corp overhead estimated to be 143m of pre-tax expenses per year, capitalized at 5x
Including Foxtel and Fox Sports adds +$8 per share
Base Case (Mid)
Low Mid High per share
Business Segments Discussed
News and Info Services $2,573 $3,217 $3,860 $5.56
Publishing 811 973 1,135 $1.68
Digital Real Estate Services (REA) - Market 3,552 3,552 3,552 $6.14
Other Business Segments
Foxtel $3,262 $3,728 $4,194 $6.44
Fox Sports 1,260 1,386 1,512 $2.39
Amplify $0.00
Cash $2,381 $2,381 $2,381 $4.11
Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)
Net Cash Equivalent $1,331 $1,331 $1,331 $2.30
Less: Corp Overhead (2) ($715) ($715) ($715) ($1.24)
Less: Unfunded Pension Obligation (270) (270) (270) ($0.47)
Equity Value - REA Market $11,804 $13,202 $14,599
Share Price $20.39 $22.81 $25.22 $22.81
Current Stock Price $15.52 $15.52 $15.52
% Prem ium / (Discount) to Curren t 31.4% 47.0% 62.5% 47.0%
$ in millions, unless stated otherwise
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(3) Amplify
$ in millions
Net Asset Build
$3,217
$973
$3,552
$3,728
$1,386
$234$715
$1,331$270
$13,436
$4,452
$8,984
$0
$4,000
$8,000
$12,000
$16,000
News Publishing REA Foxtel Fox Sports Amplify Corp. OH Net Cash Pension Def. NAV Discount Market Value
~50%discount
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Fully integrated technology based learning solution
for the $40 billion addressable market throughtablet based platform (1)
Teachers can monitor students
Administrators can deploy content to tablet
Districts can evaluate schools with custom standardizedtests
Digital delivery of high-quality curriculum toimprove the K-12 market
Attempting to address the problem that from 1970 - 2010education system has doubled their investment from $5kto $11k but the NAEP test scores have remained thesame (2)
Education Bet: K-12
Amplify
(1) http://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embedded(2) http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0
http://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.nytimes.com/2013/09/15/magazine/no-child-left-untableted.html?pagewanted=2&_r=0http://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embeddedhttp://www.youtube.com/watch?v=-_K4Q3qxK0A&feature=player_embedded8/13/2019 2014.02 News Corp Investment Idea
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Amplify Estimated Worth is $234mm
Amplify Low Mid High
Original Investment Cost $390 $390 $390
(x) Discount Factor 20.0% 60.0% 80.0%
Value $78 $234 $312Per Share $0.13 $0.40 $0.54
News Corp paid $390 million in 2011 and invested an additional ~$180mm
Applying a discount to original investment,
Amplify is worth ~$234mm
$ in millions, unless stated otherwise
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What is NWSA Worth?
Base Case (Mid)
Low Mid High per share
Business Segments DiscussedNews and Info Services $2,573 $3,217 $3,860 $5.56
Publishing 811 973 1,135 $1.68
Digital Real Estate Services (REA) - Market 3,552 3,552 3,552 $6.14
Other Business Segments
Foxtel $3,262 $3,728 $4,194 $6.44
Fox Sports 1,260 1,386 1,512 $2.39
Amplify 78 234 312 $0.40
Cash $2,381 $2,381 $2,381 $4.11
Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)
Net Cash Equivalent $1,331 $1,331 $1,331 $2.30
Less: Corp Overhead (2) ($715) ($715) ($715) ($1.24)
Less: Unfunded Pension Obligation (270) (270) (270) ($0.47)
Equity Value - REA Market $11,882 $13,436 $14,911
Share Price $20.53 $23.21 $25.76 $23.21
Current Stock Price $15.52 $15.52 $15.52
% Prem ium / (Discount) to Curren t 32.3% 49.6% 66.0% 49.6%
$ in millions, unless stated otherwise
(1) NWSA stated in Investor Presentation (May 2013) Foxtel debt was $2.1B. NWSA share is 50% of it(2) Corp overhead estimated to be 143m of pre-tax expenses per year, capitalized at 5x
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Appendix
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31
NWSA Valuation
(1) NWSA stated in Investor Presentation (May 2013) Foxtel debt was $2.1B. NWSA share is 50% of it(2) Corp overhead estimated to be 143m of pre-tax expenses per year, capitalized at 5x
REA Valued Based on Comps (Market Correction on REA Value)
Base Case (Mid)
Low Mid High per share
Business Segments Discussed
News and Info Services $2,573 $3,217 $3,860 $5.56
Publishing 811 973 1,135 $1.68
Digital Real Estate Services (REA) - Comp Method 1,767 1,884 2,002 $3.26
Other Business Segments
Foxtel $3,262 $3,728 $4,194 $6.44
Fox Sports 1,260 1,386 1,512 $2.39
Amplify 78 234 312 $0.40
Cash $2,381 $2,381 $2,381 $4.11
Less: Debt (1) 50.0% $2,100.0 (1,050) (1,050) (1,050) ($1.81)
Net Cash Equivalent $1,331 $1,331 $1,331 $2.30
Less: Corp Overhead (2) ($715) ($715) ($715) ($1.24)
Less: Unfunded Pension Obligation (270) (270) (270) ($0.47)
Equity Value - REA Comp Method $10,097 $11,768 $13,361
Share Price $17.44 $20.33 $23.08 $20.33
Current Stock Price $15.52 $15.52 $15.52
% Prem ium / (Discount) to Curren t 12.4% 31.0% 48.7% 31.0%
Base Case Valuation ranges from $20-$23
depending on REA method of valuation
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$0
$4
$8
$12
$16
$20
Jul-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
Bought shares inDecember, January and
February for an averagecost of $16.76 per share
News Corp Share Performance