Fox Should Dump Broadcast Net, Says Wall Street Analyst

In a note to clients today, the influential Wall Street research firm MoffettNathanson mulls whether Fox Corp. should sell the Fox network and stations and concludes with an emphatic yes.

“We see no material business logic for Fox to hold onto the Fox broadcast network given the modest value that the market is ascribing to the television segment,” the 22-page analysis says.

Prior its spin off of its core entertainment assets to Disney last year, owning the broadcast network made strategic sense. It served as an outlet for the Fox Hollywood production and syndication arms and it could be used to promote and support the regional sports and other cable networks.

“Finally, when the company was interested in using the promotional power of their footprint and the ownership of key scripted content to build a major SVOD service like Hulu, the ownership of the Fox network made a ton of sense.

“But that was then and this is now.” it says. Without the strategic value, it says, Fox Corp. would be better off selling the network to a studio owner like AT&T’s WarnerMedia or to any entity looking to use the power of broadcasting to launch direct-to-consumer streaming services.

The report says that Fox News, the corporation’s flagship cable network, is strong enough to bargain with the MVPDs without the help of the broadcast network.

“We assume that FS1, FS2 and the Big Ten Network are not large enough to defend on their own and should be bundled in with the Fox network and shopped together,” it adds.

“We would urge Fox management to renew their Sunday NFL package, pass on the loss-making Thursday NFL package and use the two-year anniversary of their life as a new company in March 2021 to consider their options vis-à-vis the television assets.”

The report also says the Fox network is becoming increasingly dependent of the combination of retransmission consent revenue and reverse comp payments from its non-O&O affiliates.

Given the high losses generated by sports contracts at the national network level and the high margins of the Fox affiliates, “it would be logical to assume that … [they] have to kick in higher and higher reverse retrans rates going forward.”

Assuming Fox Corp. holds on to the network, the report forecasts that reverse comp payments will grow around 50% between 2020 and 2024, from $2 billion to nearly $3 billion.

MoffettNathanson has a buy recommendation on Fox at a target price of $36. It opened today at $26.