Rupert Murdoch knows how to spin a story. To sell the idea of reuniting his Fox television and News Corp tabloid businesses, the 91-year-old media mogul will have to marshal his strongest and most creative pitch yet.

Image via Refinitiv

A decade ago, Murdoch split his movies-to-books empire because it had become too broad and complex. In 2019, his eldest son Lachlan insisted that the slimmed-down Fox (FOXA), which had just completed the sale of its studios and entertainment networks to Walt Disney, could “see no logic in reversing the benefits” of the earlier breakup decision and vowed that “we will not reunite with News Corporation.” It’s hard to see what has changed.

As it stands, both $16 billion Fox and $10 billion News Corp suffer from significant valuation discounts, partly due to their common owner’s grip. Rupert Murdoch and his family trust control roughly 40% of the vote at each company, and although his wheeling and dealing over the decades has generated value for shareholders, his mercurial approach warrants a large dollop of skepticism.

To see how big, look at today’s News Corp, which is more an online real estate company than a newspaper publisher. It owns roughly 62% of Australian housing portal REA, a stake worth $6.7 billion based on its Wednesday closing price in Sydney. News Corp also owns 80% of U.S.-based Move, home to Realtor.com and other similar sites. Valued on a conservative 2 times expected revenue – about half the multiple rival Zillow commands for its core technology sales – the stake would be worth some $900 million, according to Breakingviews calculations.

The implication is that the rest of the News Corp enterprise, including about $1.5 billion in net debt, is worth just $4.2 billion. Yet analysts expect Dow Jones, with its Wall Street Journal and other professional subscription services, to generate some $500 million of EBITDA in the year to June 2023, per Refinitiv data. On the same 16 times multiple as New York Times, it would be worth about $8 billion.

The HarperCollins publisher of bestsellers by Don Winslow, Ann Patchett and others is worth at least another $2 billion if valued at 7 times forecast EBITDA. Meanwhile, Australian, British and American newspapers such as The Times and New York Post, on the same valuation multiple as peer Gannett, tally nearly $900 million. News Corp’s 65% stake in Australian video-streaming business Foxtel could be pegged at some $2.7 billion if Dish Network is any guide. After subtracting some $2 billion of capitalized corporate costs, it all adds up to $18 billion, suggesting that News Corp’s market value is about 40% less than the sum of its parts.

It’s a similar story at Fox. The TV portfolio also contains a Hollywood studio lot, stakes in sports betting sites FanDuel and Flutter Entertainment, and deferred tax losses that can offset future profit. These ancillary assets are worth some $6 billion, MoffettNathanson analysts reckon, after netting out a negative value for its holding in a U.S. college sports network.

Subtract these assets and factor in $2.3 billion of net debt, and the implication is that the main Fox broadcasting enterprise is worth around $12.4 billion, or less than 4 times expected EBITDA. Rival Paramount Global trades on more than 9 times.

Thumb on the scale

If Murdoch’s two dissimilar media outlets are struggling to achieve full recognition from investors in their current form, it’s unclear why they would come into better focus under one corporate roof. Fox boss Lachlan Murdoch declined to comment earlier this month on merger prospects, but suggested in response to a question that size was one reason that special board committees of both companies are studying a potential deal.

“Scale is important,” he said. “And what we’ve seen amongst our media peers over the last few years, our peers getting bigger through mergers and acquisitions.”

It’s true that a union might yield some small cost savings, greater negotiating power with advertisers and a stronger balance sheet, but such merits will be hard to impress upon News Corp (NWSA) shareholders. They back a company increasingly reliant on more durable subscription revenue, while Fox depends on volatile marketing budgets that happen to be shrinking as corporate bosses brace for a potential recession.

What’s more, having weathered a phone-hacking scandal at Murdoch’s UK newspapers, News Corp owners will be understandably hesitant about absorbing the U.S. legal and reputational risks facing Fox News. They include a $1.6 billion defamation lawsuit from Dominion Voting Systems accusing the network of falsely claiming the voting machine company rigged the 2020 U.S. presidential election against former President Donald Trump. The ageing Fox News audience is another justifiable concern.

At least one investor wants News Corp to get smaller, not bigger. Irenic Capital, which owns about a $150 million stake, is urging the company led by Robert Thomson to separate the online real estate businesses. Even if News Corp rejects the idea, there are better ways for it to get bigger than as the junior partner in an all-share merger with Fox.

Rupert Murdoch may have ulterior motives that include possibly succession planning. Still, he will need to make a strong case for the financial logic of any transaction, as both companies would have to secure support from a majority of the non-Murdoch votes.

The mogul has overcome resistance before. As Morningstar’s Australia-based Brian Han recently noted, “Over the 25-year span of covering News Corp in its various forms, this analyst has never encountered a corporate transaction where the wishes of the Murdoch family were not met.” This time, though, those wishes will have to bend to those of a more diverse group.

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