The worsening outlook for the Australian TV and media and markets and the looming Foxtel/Fox Sports merger and revamp have forced News Corp to make new impairment losses of up to $US1.1 billion.
The write downs are part of the merger and revamp of Foxtel and Fox Sports with Telstra. The two companies announced yesterday (http://investors.newscorp.com/node/8936/html) that they had entered into definitive agreements to merge Foxtel and Fox Sports with News taking 65% as previously announced and Telstra taking a 35% stake. Previously the two companies controlled Foxtel with 50% each and News owned 100% of Fox Sports.
Telstra also made an announcement yesterday and instead of sharing in the red ink of News, it said it would be booking a one off accounting gain currently estimated at $A263 million.
The impairments are in addition to the $US227 million News wrote off the vaue of Foxtel in early 2017. Final details of the allocation of the losses will come in the March quarter accounts in early May.
News said inyesterday’s announcement that the wide range “reflect(s) its best estimate of the charges at this time; however, the Company continues to evaluate the amount of the write-downs and impairments. Until the evaluation has been finalized, the Company can make no assurances that this range will not change. The Company does not expect that any amount of the write-downs or impairments will result in current or future cash expenditures.”
News explained that the need for write downs was agreed on during long range planning for the merger of Foxtel and Fox Sports.
“During the third quarter of fiscal 2018, as part of the long range planning process in preparation for the Transaction, the Company assessed the long-term prospects for Foxtel and FOX SPORTS Australia, on both a stand-alone and combined basis.
“As a result of lower-than-expected sales of certain new products and broadcast sales at Foxtel, the Company revised its outlook for Foxtel and FOX SPORTS Australia, which resulted in a reduction in expected future cash flows.
“Based on the revised projections approved in connection with the Transaction, the Company concluded that it expects to recognise a write-down of its Foxtel investment and an impairment of long-lived assets at FOX SPORTS Australia in the range noted above,” News said in yesterday’s statement.
In other words, the outlook for Pay TV assets, TV audiences and ad sales has worsened to the point where the valance sheet values for these assets are too high, especially with the merger happening.
Reinforcing that decision has been the slump in the price of the only listed pay TV operator in this part of the world, Sky TV in New Zealand which used to be 43.6% owned by News Corp prior to the split in the Murdoch empire in June 2013. Sky is chaired by Peter Marcourt, former long time News Corp executive and former chief operating officer of News Ltd.
But take a look at what has happened to the shares of Sky TV in recent days. It is the only listed Pay TV service on the Australian and NZ stockmarkets and its shares have been under enormous pressure as investors fall out of love with Pay TV and the legacy media generally. This also tells us that News and Telstra will be battling to convince investors to invest i the planned float of the combined Pay TV giant without a a realistic offer price.
The write downs announced by News are an attempt to set a realistic value on the merged company, but it does confirm that the only for the business to go in coming years is to shrink once the merger is settled.
NZ’s Sky Network Television share price fell to record lows on Monday and yesterday in NZ as it battles unsuccessfully to halt falling subscriber numbers, revenues, profits (sounds like Foxtel’s recent experience) – all of which have forced the company to cut its dividend in half to protect cash flows.
The collapse in Sky’s share price – down more than 18% in the past five days including 4.6% on Monday to the low of $NZ2.28 yesterday (and down 38% in the past year) is the lowest since it merged with Independent Newspapers in 2005 (both were controlled by then Murdoch-controlled News Corp). Last month Sky TV cut its interim dividend to 7.5 cents a share, half the 15 cents it paid a year earlier.
The latest fall in the share price came three days after it confirmed it had joined former News Corp stablemates, Foxtel in Australia and Sky Plc in the UK in talking to Netflix and other video streaming companies about a deal to offer these services. Sky in the UK is more advanced and will start offering a single bill arrangement with Netflix later in the year.
Foxtel is in the early days of talks with Netflix and perhaps Stan (half owned by each of Fairfax Media and Nine Entertainment Co. This is the Murdoch empire throwing in the towel on trying to make a success out of streaming. Netflix is now too dominant. News is making sure it doesn’t repeat the mistake it made with Google, then Facebook of ignoring their rise until too late.
Like Foxtel (which lost between 100,000 and 160,000 subscribers in the past year to 18 months after the collapse of its Presto streaming service and the rise of Stan (933,000 subscribers) and Netflix (no figure on Australian subscribers). Sky is losing subscribers – down more than 60,000 in the past year.
Sky TV was valued at less than $A870 million at yesterday’s record low close. That’s less than the valuation set when News sold out in March 2013 ahead of the split in the Murdoch empire. News sold its 43.6% in Sky for $NZ4.80 a share, or around $NZ815 million. Sky TV’s share price then was $NZ5.17, valuing it hat $NZ2.01 billion. That fall of $NZ1.135 billion tells us how the subscription TV business has changed in Australasia.