News Corp (NWS) deep dive w/ Will Granger | Airlie Funds

Bryce: [00:00:13] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing and whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. Now, if you've just joined us for the first time, a huge welcome. Thank you for joining the equity mates community and congrats on starting your investing journey. If you feel like you need to get up to speed with the basics. Check out our Get Started Investing podcast. With that said, my name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:46] I'm very good, Bryce. Very excited for this episode. We are breaking down a company that has influenced all of our lives and that most of us in one way or another, give money to, or at least give our eyeballs that they get advertising revenue. 

Bryce: [00:01:04] A lot of attention. 

Alec: [00:01:05] We're doing it thanks to Airlie. 

Bryce: [00:01:06] That's right, Ren. Airlie has an active investment style that aims to deliver attractive long term capital growth. And we're fortunate enough to have had the founder, John Sevior, we had him in the studio last year and also one of their portfolio managers, Emma Fisher, has joined us a couple of times on the show, both to awesome investors and we're lucky to have another portfolio manager in the studio today, Will Granger, to help us unpack NewsCorp. Will is a portfolio manager for the newly launched Airlie Small Companies Fund. They're investing in 20 to 40 stocks that they consider to be high quality businesses in the small cap space or small companies space. 

Alec: [00:01:46] And News Corp is one of those businesses. And so we're going to spend the first half of this episode giving a bit of a primer on the company, News Corp, what it does, And then Will is going to join us in the studio to talk about the investment side, the bull case, the bear case, and what the company's trying to be long term. 

Bryce: [00:02:04] So for information on the Small Companies fund, we'll provide a link in the show notes. You can go to the Airlie funds management dot com dot our website. And a reminder that while we are licensed we are not aware of your personal circumstances. So any information is general and is for entertainment and education purposes. But again, with that said, News Corp. 

Alec: [00:02:26] News Corp. So Rupert Murdoch's baby that he had to split in two in what, 2011, 2012 with the News of the World hacking scandal. Yeah. For people unfamiliar News Corp is a media conglomerate with major divisions in newspaper publishing, book publishing, digital real estate services and subscription video services. The company comprises some of the world's most recognisable and respected brands, including the Wall Street Journal, Barron's, The Sun, The Australian, HarperCollins Publisher, RealEstate.com.au are You, Realtor.com and Fox have some. 

Bryce: [00:03:03] Big names in there. 

Alec: [00:03:04] Most people in Australia would also probably be familiar with Kayo with Binged, the streaming service with the Daily Telegraph, your morning newspaper.

Bryce: [00:03:15] Now having word in it. 

Alec: [00:03:16] Ever.

Bryce: [00:03:17] Not. Hate it?

Alec: [00:03:18] Wow that's strong. Yeah. And they don't even think about you. News Corp is a media giant and it's got massive news businesses in the US, the UK and Australia. But when we look at it from an investing point of view, the newspapers are all but one of the newspapers don't really matter. But we'll get to that.

Bryce: [00:03:44] We'll get to that. Let's have a bit of a walk down memory lane Ren, and look at the history because it's a pretty fascinating journey and one that, you know, is it's pretty amazing to see what what Rupert has actually built. Established in 1980.

Alec: [00:03:58] The News Corp.

Bryce: [00:04:00] But it all started back in 1952 when Rupert inherited an Adelaide afternoon tabloid called The News. I think his dad was running it at the time and that was the beginning of the of the Empire in 1964. Rupert first publishes The Australian. In 69, he expands to the UK with the News of the World, followed closely by the Sun. In 73. He expands to the USA by purchasing the San Antonio Express and News, and then in 1976 purchases New York Post. So in 20 years he's gone from Australia through the UK into the US. 

Alec: [00:04:44] Yeah, in the eighties he buys the Times and the Sunday Times in the UK and in the mid eighties he moves into movies and TV's in a big way. 1985 buys 20th Century Fox and also buys Metro media television stations and launches Fox Broadcasting Company 1987 acquires Hopper and Rowe and in 1989 acquires will. William Collins sons merges them together and makes the book publisher HarperCollins, 1989. Late late eighties early nineties is when he really pushes hard into cable TV. Yeah. Launched Sky TV in 1999 in the UK, launches Foxtel as a joint venture with Telstra in 9596 launches Fox News and American politics is never the same. This is my favourite part of the Rupert Murdoch story. In 2005, he buys MySpace for $580 million. Tom from MySpace is now living his best life. If you don't follow him on Instagram, you should too. $580 million in 2005. In 2011, News Corp sell MySpace to Justin Timberlake for $35 million. That's about a 95%. If my math of top of my head, 95% full. 

Bryce: [00:06:09] Unbelievable. I don't think he still owns it. 

Alec: [00:06:12] Justin Timberlake.

Bryce: [00:06:14] Who owns I don't know. I think I thought he sold it. I can't remember what I can't remember who or where, but I'm. Yeah. Fact check me on that. 

Alec: [00:06:22] I'm actually just saying if the website still exists, it's it's such a music website now the you go to it and the headline is Red Hot Chilli Peppers, Nine Inch Nails, Slipknot and Kiss to headline Louder than Life Line Up. There you go. 

Bryce: [00:06:36] Anyway, anyway, completely unrelated. Sorry. In 2007, Rupert buys the Dow Jones and Company, which owns the Wall Street Journal. 2011 was the News of the World scandal. 

Alec: [00:06:50] Do you remember what happened there?

Bryce: [00:06:51] Yeah, they were phone tapping. It's massive. Which forced the merger of Fox Corp and News Corp. And then in 2009, most of Fox Corp's entertainment assets in a massive deal was sold to Disney. Yeah, it's a story of mergers and acquisitions, bolting on media. It's a huge business.

Alec: [00:07:11] I mean, he was a very good media entrepreneur. Yes. This guy got the Bryce Leske of his day. Somoza. 

Bryce: [00:07:17] Thank you.

Alec: [00:07:19] So that's the history. Let's talk about what News Corp is today. And it is really a business of five segments for the first segment is its holding of real estate dot com W it owns a majority stake and it also owns Realtor.com in the US which is not the biggest. Zillow I think is the biggest, but it's a real estate listing website subscription, video services. So that's its streaming services and its cable offering. Foxtel's still kicking along, but it's more Kayo and Binge and I think they have, uh, off the top of my head, I can't remember if it's majority or minority, but they own a stake in BSkyB, which was the merger of the two UK cable providers. Dow Jones is its third segment, which publishes the Wall Street Journal, but also has a pretty meaningful business to B2B data business. It sells like financial information. So that's three number for book publishing with HarperCollins. And then number five, news media. And that's what a lot of us would think when we think of News Corp, that's The Australian, the Daily Telegraph, the UK newspapers, The Times and the Sun's, The Sun, and it just what, there's just one sun. And then are there any more newspapers and I'm forgetting any of the big ones. 

Bryce: [00:08:40] I think so. 

Alec: [00:08:41] Like the Herald Sun and stuff, but like nothing in the US. Yeah. Now somewhat confusingly, they never reorganised the company and put the Wall Street Journal in with the other newspapers. Probably because it's the Starchild. 

Bryce: [00:08:57] Yeah, well, as we find out. 

Bryce: [00:08:58] From Will, it's. It's light years in front of its competition. 

Alec: [00:09:03] Yeah, but that's the five businesses. Now the really interesting thing when we speak to Will he doesn't really factor in the print newspapers in his thesis but they do bring in the most revenue in the last financial year they brought in $2.4 billion in revenue, which was the highest of those five segments. But they also brought in the smallest amount of profit, $217 million of EBITDA. And so that's really the story of the news business. 

Bryce: [00:09:34] It's the story of media. 

Alec: [00:09:36] Yeah. Whereas digital real estate services brought in the least amount of revenue, 1.7 billion. 

Bryce: [00:09:44] Being real estate dot com and Realtor.com. Yep. Yeah. 

Alec: [00:09:47] Their share of those businesses. But it brought in the most amount of profit 574 million Ebitda. And so the story of News Corp is a story of a lot of assets, some probably higher quality than others I think it's fair to say. And when we speak to Will, he really highlights the three that are the most important for. And for him, digital real estate services, which is real. Aria grew Dow Jones, which is the Wall Street Journal and its B2B data business and book publishing, which is HarperCollins. How surprised that book publishing was such a big thing. 

Bryce: [00:10:26] Because made to 

Alec: [00:10:28] A book publishing feels like an industry that is brutally tough and getting squeezed. 

Bryce: [00:10:34] Yeah. Yeah. Well, again, he mentions it in the second half of this, but books are on a bit of a resurgence, apparently.

Alec: [00:10:42] Yeah, that's why we've written another one.

Bryce: [00:10:45] Stay tuned. So we probably do a quick explainer rate on the share structure, because if you're Googling this and wanting to invest, you might find that there are a number of tech stock tickers available. So firstly, you have the News Corp listed on the ASX and the stock ticker is NWS. You also have News Corp listed on the Nasdaq in two forms. One ticker is NWS I and the other is NWS. The difference here is really the class structure of the shares. So NWS in the US and here in Australia is Class B and USA over on the Nasdaq in the US is Class A, So the difference being that Class A in the US doesn't have any voting rights. Class B here in Australia does. 

Alec: [00:11:36] And that's a way for the Murdoch family and the Murdoch Family trust to own a smaller percentage of the total company but maintain control which is not uncommon. Google Snap. A whole bunch of companies have different classes of shares and. 

Bryce: [00:11:53] Equity Mates. 

Alec: [00:11:54] And equity Mates. Yeah, so but that's just something to keep in mind. If you're getting confused about which News Corp you want to buy. Quick rundown on the financials and then let's get to Will market cap of $11.2 billion, up 26% in the past year. Not bad. Yeah, probably from all those Kayo price rises this week they. 

Bryce: [00:12:15] Got a lot of Kayo. 

Alec: [00:12:17] And then up 35% in the past five years which is about a 6% compound annual growth rate for the share price. So a bit slower than the market. 

Bryce: [00:12:26] Yeah. Revenues of 10.4 billion in FY 22 and a profit of 623 million. Worth noting that four and five years ago they were actually unprofitable. So they've been able to get back into the green and a 6% profit margin. The New York Times, for comparison, has a 7.6 and Sinclair has 7.3. So there's a bit of a run down, bit of a history of how we got to how News Corp got to where they are today. A big thank you to Airlie for supporting this episode. We're going to now hear from portfolio manager of the Airlie Small Companies Fund, Will Granger. He's going to take us through what metrics matter when looking at News Corp, the bull case, the bear case, and then the long term plans. And everyone has some questions around succession of the back. Got to ask. So if you're interested in finding out more about the Small Caps fund, the Small Caps fund, check out the links in the show notes. And without further ado, here's our conversation with Will Granger. Well, Will, welcome to equity mates. 

Will: [00:13:36] Thanks for having me. 

Bryce: [00:13:37] Now we're talking News Corp. So the first first place we want to start is how to analyse a company like News Corp, what are the metrics that matter and and which ones don't when thinking about News Corp? 

Will: [00:13:51] Well, look, in hindsight, I probably haven't chosen the easiest company for us to look at, as I'm sure you guys will be aware, It's, you know, News Corp isn't really just one business. It's really a collection of, you know, multiple businesses across the media landscape. So they own 61% of RCA, They own HarperCollins, a book publishing business. They own Dow Jones, which owns The Wall Street Journal, a variety of other newspapers, 65% of Fox sales. So there's really a lot to unpack in the business. And they're really individual businesses that need sort of individual analysis. So in order to talk about the metrics for each separate business, I even found out the other day there and 70% of the Brisbane Broncos. I did not Realise the Broncos listed, but they have. 

Alec: [00:14:34] Not been a star share market performing for the Broncos. It hasn't been too bad. 

Will: [00:14:40] But yeah, so I guess, you know, to simplify that complexity, there's really, you know, three key businesses that make up the lion's share of value for News Corp and that is REIT, their stake in REIT, Dow Jones and HarperCollins. So maybe a start, we'll focus on REIT. I'm sure your listeners are very familiar with the REIT group. You know, it's from one of the best performers on the ASX for the last 20 years and it's just a property portal. They own their real estate dotcom website, an app. Our vendors list their properties on the site and they advertise for either rent or for sale. I make money by charging them for that listing, and if you want to be higher up the search results, the vendor has to pay more. And really, when we're thinking about a business like this, sort of the key metric that we're thinking about is audience reach. At the end of the day, it's a marketing platform, so it really matters, you know, the amount of people that you're bringing to the table. So we care a lot about audience reach and we care about how that audience reach then translates into sort of share of industry economics for the business. Aria is the dominant player in the industry. It's got around 50% higher audience reach than domain. So it's got around 12.7 million unique average monthly users. And again, the more audience you bring to the table, the more you can charge for listing. So if you think about the actual revenue share in the industry, ARIA generates around three times the revenue of domain. So it's got a 75% revenue share. But even more importantly, that actually translates to a larger share of the profit line. So ARIA captures 90% of industry profitability. And profits are really important because at the end of the day, if you're at a higher Profit. Profits are really important because the larger your profit pool, the larger margins, the more you can reinvest back into the business. So for ARIA, that's investing back in, you know, website and app development, it's investing more in marketing, all of which then leads to more audience. And it's sort of a virtual cycle of reinvestment that further entrenches the competitive position. So, you know, it's a really strong and established business model. If you think about it from the user's perspective, it doesn't cost me anything to go on realestate.com.au. So for me to switch across, I need some sort of incentive in this. There's no incentive if you know, the product functionality, the app and website are basically equivalent, the listings are basically the same, and I'm getting marketed to more by aria than I am by buy Domain. So I've got no incentive to switch across all of these really sticky customer habits that are really hard to disrupt if you're the number two player. 

Alec: [00:17:17] Well, my partner and I are currently butting heads because she uses a domain and I use. 

Bryce: [00:17:21] To get. People that use them. I know she feels inferior. 

Alec: [00:17:27] Big sticking point in our relationship. So let's not go down there. So Aria is the first, I guess, and one of the bigger parts of the NewsCorp business now. But we can just invest in Aria directly if, if we want to. So let's move to the other News Corp items. Yeah. Most people think of it as a you know, they just say it produces media for people like us to buy. But a key part of its business is its B2B business. And that's Dow Jones. 

Will: [00:17:56] Yeah, the Dow Jones, the segment we're very bullish about. We think it's a really great business that's a little bit misunderstood by the market. There's been a tremendous amount of change that's happened in that business. So the key asset is really the Wall Street Journal and Dow Jones. So it's best to focus on that. And if you think about what's happened in the newspaper industry over the last 20 years, it's gone under, you know, a lot of a lot of change. So newspapers make money in two ways. They sell subscriptions to the paper and they sell advertising in the paper. And if you flashback 20 years ago, you know, the majority of revenue for newspapers used to come from advertising. They had these amazing little localised monopolies, extremely profitable businesses. Plenty of great investors made a fortune investing in newspapers. People like Warren Buffett, you know, Rupert Murdoch used to call them rivers of gold. But with the advent of the Internet, a lot of that advertising revenue shifted online to digital players like Facebook and Google. I think newspaper ad revenue in the US peaked at around 80 billion in the early 2000s and declined by 80% over the next two decades. So it's been this huge disruption and it's a huge headwind for the industry. And in response to that, they've all had to pivot their model, They've had to transition away from the ad reliant model to one that focuses on maximising digital subscriptions. You know, so one of the metrics we like to look at when we're analysing Dow Jones or analysing the Wall Street Journal is, you know, what portion of revenue do they still generate from advertising, in particular print advertising, because that's been what's most, what's been most affected. And that gives a good sense for, you know, how far through the transition model the newspaper is for the Journal, that's around 13% of their revenue coming from print advertising. You know, that's a huge improvement considering that just ten years ago 40% of their revenue came from print advertising. I compare that to some other players in the market to look at Nine's mastheads. They own Sydney Morning Herald and AFR. They generate around 20% of their revenue still from print advertising, so they're a little bit behind in that transition. The gold standard that everyone points to is the New York Times, which is separately listed in the US. That business generates around 9% of its revenue from print advertising. So it's a little bit ahead of the journal, but both of them are pretty on par and definitely the leaders in the market in terms of getting through that transition. 

Alec: [00:20:10] And is your view? That that's just going to go to zero over time. 

Will: [00:20:13] Eventually it will probably go to zero. I mean, maybe not zero. I think people really like writing physical newspapers. I'm one of them. 

Alec: [00:20:19] Yeah, same. But now that five bucks a paper like, yeah, if you don't have a subscription, it's. 

Will: [00:20:24] Yeah. Yeah. It's an interesting one because everyone thought that, you know, Kindle would, would end up taking over the world of book publishing and don't read physical books. But there's been a bit of a switch back to physical papers. The economics don't quite work out as well so it's becoming really prohibitive. It's too expensive as you're suggesting. So I don't know, maybe it goes to zero, but it's certainly the riskiest bucket of revenue stream for those businesses. So you want to be careful because if you're buying, you know, a business that's still got a lot of its junk coming from print advertising, there's a chance that goes, is there? And that's a big headwind. 

Bryce: [00:20:56] Harvey Norman's keeping them in business. The amount of print advertising that it does is ridiculous. It's unbelievable. 

Will: [00:21:04] The other thing we sort of think about is, is the competitive advantage really comes back to scale in newspapers. And we think about scale in terms of, you know, the level of digital subscribers and the potential for digital subscriber growth. So for the Journal, it's really the world's most established financial newspaper. It's got 3.3 million digital subscribers. That's three times that of its nearest competitor. And as with REIT scale it affords advantages. You can invest more in a newsroom. You know, you can attract the best journalistic talent. You can spend extra money on the digital experience ensuring that that's right. You just improve the product. It in turn attracts more, more audience and more subscribers. And it's a it's again, it's a sort of self-reinforcing cycle. So we think it's got really good scale advantages. Importantly, there's plenty of room for subscribers to grow management of the addressable market at 12 million digital subscribers, that's three times the current base. So there is a huge runway there. And it's interesting to think about the actual, you know, the customer cohorts for the Journal. It's again, it's a business newspaper. So I think the three largest customer cohorts that they give or subscriber cohorts, I should say, are financial advisors, retirees and people who work in finance. I don't know why they separate those two, but they're the three largest cohorts. And if you think about that, you know, journals are a really vital source of information. It's a really key piece of information for their business. It's a core business expense for the retirees. It probably shapes the way in which they manage their retirement savings. And it's a tool for wealth creation for them. And that's a really different sort of subscriber subscriber base versus something like, say, the New York Times, which I think is really, really beneficial and speaks to the sort of pricing power dynamic. I look at my own reliance on the IFR in Australia and, you know, I can't imagine unsubscribing from that. I really need it for work. So they've got a lot of pricing power. So I think that's really interesting to think about. You've got not only just a really good long term subscriber growth story, but also a good pricing power story there as well.

Bryce: [00:23:05] The third big section of the business is HarperCollins. So how do you kind of look at that? Yeah.

Will: [00:23:10] So HarperCollins, it's the world's second largest consumer book publisher. And, you know, when I think about the book publishing market, it's really an oligopoly. There's five big players, so they're often called the Big five. Penguin is the largest of HarperCollins, Simon Schuster, Charlie Frey and McMillan and those Big five compete with one another to acquire publishing rights from authors. And they do that by offering advances, which is just big sort of lump sum payments. And you're, as with Dow Jones and as with RCA Scale is again, you know, the really important factor that drives these businesses for book publishing in particular, it's the scale of your backlist or your back catalogue, because that's sort of a really vital revenue pool from which you can then go and invest in new projects. If you think about book publishing, you know, only a very small fraction of books published are ever commercially successful, which means you really need a big backlist to be pool of revenue to go and make a lot of really small bets. A few of those bets will pay off. So, I mean, I look at HarperCollins backlist and it's a collection of classic authors. You've got J.R.R. Tolkien, you've got Agatha Christie, C.S. Lewis, Those are authors that are going to be generating revenue not just in ten years, but in 20 and 30 years. And it's this really, you know, hard to replicate pull off of revenue that can be reinvested back into the core.

Alec: [00:24:25] You've got equity mates. So I guess three big businesses and how you think about it. But when most people think about News Corp, they think about the Australian newspapers that, you know, they walk past most days, How do you think about them or do you think about them at all? 

Will: [00:24:44] With the end of the day, they're not really material enough to make a big dent in your valuation. So it's not an era I spend too much time looking at. And you know, if I think about to The Australian is in the news media segment for News Corp and that you know the valuations there might get to, you know, 3 to 500 million but it's just one paper in that segment. They've also got the New York Post, the At the Sun, the Sunday Times in the UK. So it's a tiny segment. It's an even smaller part of a tiny segment. So I don't spend too much time thinking about the economics of something like The Australian. So, yeah, it's just it's it's not big enough. 

Bryce: [00:25:18] All right. Well, let's move to the bull case. When you're thinking about competitive advantages and building an investment thesis for the bull side. What does that look like for News Corp? 

Will: [00:25:28] Yeah, I think the sort of the Key. Bull case for News Corp is that you've had this immense transformation in the business over the last ten years. That's fast to improve the quality of the business, particularly in Dow Jones more than the other segments. And, you know, I think that improvement in quality has been, you know, largely overlooked by the market, but misunderstood. And it's also it hasn't been really reflected in the share price. You know, if you look at News Corp, it's really a collection of some very high quality businesses, but they're trading at bargain prices. So the end of the day, the bull, both thesis really comes back to how attractive the valuation is and just to put some numbers around that. So, you know, if you go and apply a New York Times multiple to Dow Jones, we think that's defensible for a couple of reasons. For one, Dow Jones is actually a higher profit margin business and it's got a better track record. There's a little bit of difference in Dow Jones outside of professional information business. And I will sort of leave that to one side rather than get too into the nitty gritty. But if you apply that multiple The New York Times multiple to Dow Jones, and then you take the market value of News Corp stake in RCA, you basically get to the current share price. So that means you're getting theoretically the rest of the assets for free. And those assets hold immense value. You're getting HarperCollins, which we've discussed, you know, it's the world's second largest consumer book publisher to a really attractive business really capital. What it generated around 350 million of a beat last year. You're getting an 80% stake in Realtor.com which is basically the domain of the US market. It generated $700 billion in revenue last year. Co-star were recently in talks to buy that business for three and a half billion. So, you know, they're just a couple of the other assets in there getting the other news media businesses. There's plenty of more value on offer and you're really not paying anything for it. And another way to potentially think about it, some listeners might say, well, look, I don't want to buy RCA at that share price. I think it's too high, it's too expensive. And I think the way to think about that is, well, if we apply it, we think a fair value for all the assets that News Corp own. Excluding RCA, you can reverse engineer the share price. You're effectively getting RCA, and that, based on our assumptions, works out to be around 60 bucks versus the current share price of 130, 140. So we think News Corp's, you know, it's a fantastic opportunity to buy one of Israel's best businesses at $0.50 on the dollar. 

Alec: [00:27:50] So that's the bull case. The bear case I'm interested in. And for me, when I think about News Corp, you know, it's a collection of great businesses and let's exclude RCA outside of RCA, they all seem to be facing their own headwinds, like the news media. We know the headwinds they're facing, book publishing and their margins are getting squeezed by Amazon, physical books being disrupted, Foxtel is being disrupted by streaming. They're kind of disrupting themselves. But what's the margin story there? It feels like for every individual segment that you could sort of talk about the headwinds there. So tying it all together outside of RCA, what are you most concerned about investing in this company?

Will: [00:28:32] Well, so to address. Some of those points, if you look at book publishing, for example, it's interesting, everyone's obviously got concerns over Amazon's purchasing power and the potential shift to digital books and what that means for the industry. And again, sort of, you know, concentrated purchase power from that. The key customers, obviously News Corp's, was a separately formed entity when it split off from Fox. But you can go back and look at News Corp's history before that and they've owned HarperCollins for something like, you know, more than 20 years and its margins have been basically flat over that whole time. So it's actually they've made some acquisitions which have helped. So maybe the underlying margin has declined a little Bit Margins have been pretty steady. So that's sort of how how I think about that. In terms of the other headwinds, something like Foxtel, you know, Foxtel's, it's a business that is facing a lot of headwinds. I definitely agree with that. I think they've done a great job operationally. You know, they're in Cairo and binge to streaming brands that have really taken off in Australia. But there's certainly a you know, it's not the best competitive position to be in.

Alec: [00:29:37] Just on that, you mentioned at the Wall Street Journal, people won't give up their subscription. You mentioned the AFL, you wouldn't give up your subscription price. And I often talk about how Kayo is going to be the last subscription for us to go. Like it feels like that's pretty rusted on one. They've got well, they've got a lot of pricing power and they're flexing that muscle at the moment as well. 

Will: [00:29:53] Yeah, they are. The hard thing with that though, is, you know, part of them flexing that muscle is, you know, on the other side of that, them having to pay more for sports rights. So, yeah, I'm not sure who is benefiting more from that arrangement. Is it the sports themselves or is it. Kyra, it's. A mixture of the two. The thing with Foxtel in terms of think about news is there's a lot of debt sitting in that entity. So when most people think about the valuation, they say, well, you know, maybe the enterprise value is 2 billion or something like that, but it's got, you know, more than a billion of debt in there. So it doesn't end up and it's a non-recourse debt. So it doesn't end up actually moving your valuation that much just because that's where most of the debt in NewsCorp sits in that segment. I think it's a business that's interesting because it has sort of turned the corner in terms of, you know, streaming as a percentage of revenue, but it's a business with a lot of debt. So it again, doesn't move the needle that much. 

Alec: [00:30:47] Okay. And then I guess the final element that I raised earlier was just that the news, the headwinds in news media and, you know, Wall Street Journal and New York Times seem to hang on to their subscribers. But is anyone else like the future of news and. 

Will: [00:31:05] Yeah. Well, I don't. Go ahead I'm going to completely butcher the stats so I'm going to say them. But the amount of paper newspaper closures in the US is just incredible. And when you think about the industry, that's probably going to be if a few newspapers with the requisite scale to survive, you know this decline in advertising revenue. So, you know, when I think about the Journal, it's clearly one of those businesses. Again, it only generates around 30% of its revenue from print advertising. So it's mostly through the transition. But on the other side of that, in some ways it's a good thing for the journal because, you know, so many papers have closed down and can't afford to scale in the same way that you actually got a reduction in competition there. 

Bryce: [00:31:48] So we'll talk about the long term plans then if news is to be successful in its, I guess, ambitions over the next ten years, what do you think the company looks like in sort of a decade? Hmm. 

Will: [00:32:02] Well, I think the company looks very much the same as it does today, but hopefully with much higher earnings. I mean, the thesis, our investment thesis for purchasing News Corp isn't predicated on any change in the business. It's purely predicated on the continuing sort of fundamental performance of the business, continue into the future. And that's supported by, you know, three key segments with very durable competitive advantages. You know, book publishing has been, you know, earnings. That business have been very, very stable, growing slightly over the last 20 years. And if you think about the ability of that competitive advantage, they should be the same in ten years. The Journal, again, it's been around for 133 years. I don't suspect that my reliance on financial information as part of my job is going to change in ten years. I think I'll still be a subscriber to the AFR and I suspect much of the Journal subscriber base will be the same. Prices will go up, likely to account for some of the lost advertising. But again, given how important that information is to running your business, we don't have a choice but to travel. And then I think about Aria. I think most people think most have a pretty familiar with the quality of that business and just are enduring that competitive advantage. So, you know, for the business to succeed in ten years, it's just gotta keep doing what it's doing. 

Alec: [00:33:19] So when we talk about long term plans, News Corp and especially the ambitions at News Corp, we have to talk about the proposed merger. Rupert's trying to get his empire back together. Does that would a News Corp and Fox Corp merger change your thesis? Would it make you more bullish? Would it make you more wary? How do you think about that possibility? 

Will: [00:33:41] Yeah, we didn't see much of a commercial rationale for the merger. I know they talked, you know, sort of publicly about how scale matters and scale does matter, but it matters at the individual business level, not at the conglomerate level in our opinion. But, you know, the special committee that was meant to be presiding over the potential merger, you know, that we never actually got anything out of. So we don't know what the terms of the merger would have looked like. But had it just been a, you know, a straight up merger, we wouldn't have been supportive of that. And I think most investors, you know, who spoke publicly about it and there were a lot of investors who did immaterial portion of the News Corp share base sort of came out against the merger. You know, we think we've got, you know, some fantastic high quality businesses that are really undervalued with News Corp. We don't want to dilute our ownership of those businesses by merging with Fox. We're not as confident about the Fox business model and its valuation. So we want to just hold on to what we've got. You know, had the merger included some sort of premium or something like that, of course, that would have changed the dynamic. But just as a straight up merger, you know, we didn't see much of a rationale and we really like our assets in News Corp. 

Alec: [00:34:45] Well, speaking of rationale, the purported rationale, alleged rationale was all about the succession planning and making sure that Lachlan could take over the full business. Rupert's 92. We've got to deal with the reality of, you know, he may not be around for much longer. I may not be in charge for much longer. Would any succession drama, any succession change? Would anything there change your thesis or is it the quality of the assets will shine through? 

Will: [00:35:14] Yeah, I think when most people think about, you know, potential succession, obviously the merger is one thing we can put that to a separate side. I won't speculate on the individual motives, not to speculate, but any sort of change in control of the trust structure, whether that's Rupert passing on or whether it's something else that happens that results in a change of control. I think most investors would look at that as potentially a positive, and that's for the simple reason that a lot of people would acknowledge. There is some really good value in News Corp and they're looking for a catalyst to unlock that value. So if that is the catalyst that unlocks that value, I think it should be, you know, positively received by shareholders. 

Bryce: [00:35:58] Well, we'll thank you so much. It's been an absolute pleasure unpacking NewsCorp with you. We've thoroughly enjoyed it and I know a lot of our audience would have taken a lot of value from that as well. So we do really appreciate the time. Thank you very much.

Will: [00:36:11] Thanks for having me, guys. It was great. 

Bryce: [00:36:12] Well, nice Ren. Will, we will leave it there as we said at the top, thank you to Airlie for supporting this episode. Airlie has an active investment style that aims to deliver attractive long term capital growth and regular income to its investors. It was started back in 2012 by John Sevior, so make sure you go and check out that episode. But yes, they've just launched the Airlie Small Companies Fund, which is managed by Will Granger. The funds typically comprise 20 to 40 investments that elite considered to be high quality businesses. So check out the link in show notes for more information. And thank you to Airlie for supporting this episode. But Ren, we'll leave it there. We will be picking it up on Monday with a review of our bold predictions and Stock of the Year. Given that we're halfway through the year and we chat with Andrew Brown to get his thoughts on where markets go from here. So make sure you tune in on our Monday episode, but always good to chat stocks. Pick it up next week.

Alec: [00:37:05] Sounds good.