Steel City Capital LP, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 7.6% was delivered by the fund for the Q1 of 2021, above the S&P 500 and MSCI All World Index that delivered a 5.8% and 4.8% returns respectively, but below its Russell 2000 benchmark, that had a 12.9% gain for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Steel City Capital, in their Q1 2021 investor letter, mentioned News Corporation (NASDAQ: NWSA), and shared their insights on the company. News Corporation is a New York-based mass media company that currently has a $15 billion market capitalization. Since the beginning of the year, NWSA delivered a 45.13% return, extending its 12-month gains to 175.25%. As of April 29, 2021, the stock closed at $26.51 per share.
Here is what Steel City Capital has to say about News Corporation in their Q1 2021 investor letter:
“History never quite repeats itself exactly. But fortunately for us, it rhymes. Earlier this year, the Partnership took a position in News Corp. (NWSA). There are a lot of similarities between Buffett’s investment in the Washington Post and ours in News Corp: the companies’ portfolios comprise(d) a collection of leading media assets; the assets are (were) on sale for a fraction of their private market values; and minority shareholders are (were) subject to the mercy of a founding family to close the valuation gap.
NWSA’s assets include a ~62% interest in Australia’s REA Group (Australia’s version of Zillow) which is publicly traded on the Australian Stock Exchange; an 80% interest in Realtor.com, the second largest online real estate portal in the U.S.; the Dow Jones Group which holds several financial media properties including The Wall Street Journal, Barron’s, and MarketWatch; HarperCollins, the second largest consumer book publisher in the world; a 65% interest in Foxtel, the largest pay-TV provider in Australia; and a collection of other print and online media properties in the U.S., U.K. and Australia.
The company – part of Rupert Murdoch’s global media empire – was separated from Murdoch’s TV and film assets (21st Century Fox, Fox News, etc.) in 2013. At the time, NWSA was widely regarded as “CrapCo” because of its focus on legacy media like newspapers and book publishing, not to mention the overhang from lawsuits related to the company’s phone hacking scandal in the UK. Living up to its nickname, CrapCo shares underperformed the S&P 500 by more than 100% from the time of the separation through year-end 2020.
When the Partnership established a position, NWSA was trading with a market capitalization of ~$11.0 billion. The company’s interest in REA Group was worth $10.1 billion, it had $1.4 billion of unencumbered cash, and no corporate debt. This implied a value for the remaining operating businesses of negative $550 million. This, of course, was utter nonsense.
HarperCollins generates average EBITDA of ~$250 million per year with virtually no capital expenditures. Publisher Penguin Random House recently agreed to purchase competitor Simon & Schuster at an implied multiple of 14.5x EBITDA, highlighting the private market value of similar assets. For its part, the Dow Jones Group continues to show success in navigating the transition away from print that has seen so many traditional publications disappear. The WSJ remains in a lane of its own as the financial and business “paper of record” in the U.S. while the New York Times and Washington Post battle it out on the political front. Dow Jones Group has grown circulation revenue at a 6% CAGR over the past five years on the back of growing subscriber numbers, generally offset print advertising declines with online ad growth (at least until COVID hit), and continually scaled EBITDA margins (18% on a TTM basis). During the last twelve months, Dow Jones Group printed $290 million of EBTIDA vs. $220 million for the comparable period in 2019. For context, the New York Times generated ~$250 million of EBITDA in FY’20 and boasts a pension-adjusted enterprise value of $7.5 billion, representing a 30.2x multiple. The comparison is somewhat apples-to-oranges in part because of Dow Jones’s Professional Information Business, but the broader point shouldn’t be lost: the private market value of the Dow Jones Group is substantially higher than what the market is giving credit for.
Since establishing a position, a couple of events have occurred and the stock price has perked up a bit. The company has: agreed to acquire Investor’s Business Daily and the consumer publishing segment of Houghton Mifflin Harcourt; entered into landmark agreements with Facebook and Google in Australia whereby the tech giants will pay NWSA for access to its news content; and raised $1.0 billion of debt. While the implied enterprise value of NWSA’s operating assets today sits closer to $5 billion, this continues to make little sense when viewed in the context of future profitability and the private market value of the assets.
Dow Jones will do at least $300 million of EBITDA this year and is growing; HarperCollins should continue to do $250 million per year; I estimate Realtor.com is generating $50 million which should also grow over time; the news agreements with Facebook and Google will probably add $50 million per annum in the early years, with the potential for significant expansion if similar agreements are struck covering geographies beyond Australia; the recent acquisitions will add $40-$50 million; and the company is in the early stages of a shared services project that management estimates will eliminate $100 million of back-office expenses. Netting out existing corporate costs and an estimated small operating loss at the legacy/traditional News Media segment yields EBITDA in the realm of $550- $600 million. At a sub-10x EBITDA multiple, the Partnership remains a buyer of NWSA shares.
So why are NWSA shares cheap? Is it the somewhat “messy” accounting that requires the consolidation of REA Group and Foxtel (which is itself a dog of an asset)? Maybe. Is it the stain associated with owning “old media” assets? Maybe. Personally, I think it’s mostly driven by general investor distaste for sum-of-the-parts stories such as this. In my conversations with other investors, many have an aversion to SOTP in the absence of a well-defined catalyst to close the gap between price and value. This exact same dynamic existed with IAC which not only traded substantially below the value of its assets, but continued to do so even after management clearly articulated plans to unlock value via a series of spin-offs (PSA: Markets aren’t fully efficient.). While I sympathize to some extent, I can’t help but feel more like Buffett when he built a position in the Washington Post. Unlocking value at NWSA might not come as quickly as your run-of-the-mill New York hedge fund would prefer, but for those with a long-term orientation, I’m confident that it will eventually occur.”
Our calculations show that News Corporation (NASDAQ: NWSA) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, News Corporation was in 32 hedge fund portfolios, compared to 31 funds in the third quarter. NWSA delivered a 34.43% return in the past 3 months.
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Disclosure: None. This article is originally published at Insider Monkey.
