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February 13, 2008

News Corp Looking At Yahoo?

News Corporation has sat out this week's rally, falling about 2%. I think the problem is fear over a bid for Yahoo. These fears persist despite very strong denials of interest from Rupert Murdoch and Peter Chernin on the quarterly conference call just ten days ago. The latest rumor is some sort of joint bid whereby News Corp puts Fox Interactive and a pile of cash into a new company that also contains Yahoo and another pile of cash dumped in by a private equity firm. News Corp would own a piece of the new entity, maybe around 20%. The new Yahoo/MySpace entity would outsource search to Google which would provide an immediate bump to operating income given that Google search monetizes at a substantial premium to Yahoo search.

Assuming this is a real deal, an assumption I would not make, and that the Google search deal would pass regulatory muster, another assumption I would not make, I have mixed feelings....

....On the one hand News Corp's value creation in Fox Interactive Media would be realized. Most valuation models for News Corp use EPS or EBITDA multiples. Since Fox Interactive Media, particularly MySpace, is way under earning relative to its private market value, the models are massively undervaluing News Corp.'s web assets. I've seen estimates that the overlooked value could be as much as $4 per share, not exactly small change on a $20 stock.

On the other hand, I have become much more positive about the ability of MySpace to monetize its traffic. The Google search deal is guaranteed for another two plus years. Display advertising is definitely ramping thanks to the new hyper targeting initiatives.

The question is whether MySpace can ever generate enough operating profit to justify the multibillion dollar private market value that exists today. In other words, would you rather have 20% of a larger entity with recognizable value today or 100% of an asset with a potentially significant higher value in five to ten years? Of course, this assumes that Yahoo is worth something significant today and that it will grow in the future.

I'm honestly not sure where I come down. If forced to choose, I'd take 100% of Fox Interactive. One thing I do know is that this is a sideshow to the momentum that exists across News Corp's asset base including the cable networks, SkyItalia, and MySpace. And that momentum is being hidden by heavy investments in the UK newspapers, Eastern European TV, Fox Business News, the Big Network and dilution form the Dow Jones acquisition.

The bottom line is that the Yahoo rumors are giving investors a great shot to buy News Corp cheap. Disney is up 2% on the year. News Corp is down 6%. Opportunity is knocking at News Corp.

Posted by Steve Birenberg at February 13, 2008 03:46 PM in NWS