Ladies and gentlemen, thank you for standing by. Welcome to the 21st Century Fox Announces Creation of New Fox and intention to merge Certain Assets with Disney Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Reed Nolte, Executive Vice President, Investor Relations. Please go ahead.
Thank you very much, operator. Hello, everyone, and welcome to today's conference call. On the call today are executives today regarding the benefits of the transactions, the anticipated timing of the transactions and intended spin off of certain of the company's businesses to create new Fox and the future business plans and prospects of the company's are forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on the most important factors that could affect these expectations, please see the company's most recent annual report on Form 10 ks or filings made with the Securities and Exchange Commission, including the Form 8 ks filed this morning.
Please note that morning.
Please note that following
communication is not an offer to sell or solicitation of any offer to buy any securities or a solicitation of any votes for approval. We urge investors to read the registration statement on Form S-four containing the joint proxy statement prospectus and all other relevant documents filed with the SEC are sent to stockholders as they become available, including the registration statement for a new FOX when it becomes available. And with that, I'm pleased to turn it over to Rupert.
Thank you, Reed. Good morning and thank you all for joining us. Today is a momentous occasion for me, our investors and thousands of colleagues who have joined us over the years in building and nurturing what has become 21st Century Fox. I have a special appreciation of the team at 21st Century Fox and I'm grateful for their hard work, their creativity and their dedication to Fox. Our journey started decades ago with a single newspaper in Adelaide, Australia.
Through the efforts and energy of many, we have grown into one of the most dynamic media companies in the world. 4 years ago, we separated our publishing and digital real estate businesses to unlock value and to focus on the opportunities for and potential of News Corp and 21st Century Fox. With today's announcement, we launched the next great leg of our journey. The world of media has obviously been undergoing rapid change. New technologies, competitors and shifting consumer preferences have redrawn the whole media map.
As a result of the transformative transactions proposed today, we are paving the way for the new Fox at a transformed Disney to charter course across a broad frontier of opportunity. As Bob and his team explained earlier this morning, the combined Fox and Walt Disney Company will be an impressive global operation, enabling us to deliver what consumers want, quality, story selling breadth and exchanges around the world. The parks and resort businesses of Disney is a leader as is their consumer products business forming a broader array of touch points with consumers. The scope of New Disney's combined storytelling, customer interactions, consolidated Hulu ownership and the international direct to consumer businesses at Sky and Star will yield a customer driven company poised for success in the future. Fox Businesses, IP and Brands will continue to flourish together with Disney and our investments are expected to earn 25% of the opportunity that the new Disney presents.
We are grateful to Bob that he is committed as part of his transaction to stay on a few years and see through the powerful vision that we share. I know he will cherish the great talent he is inheriting and appreciate the quality of the individuals that will certainly play a crucial role in fashioning the future for Disney. Now to the new Fox. This will be a growth company centered on live news and sports brands and the strength of the Fox network. Those of you who know me, now I'm a newsman with a competitive spirit.
When we launched Fox News, the consensus was that America had an appetite for another cable news network, well never wrong. When we launched the Fox broadcast network, we were written off by the conventional wisdom and told there was no need for a 4th major network. The story, the same story holds true of Fox Sports 1. The new Fox is one of an important lesson I've learned in my career in media, namely content and news relevant to you will always be valuable. So there's no wonder we're excited for the possibilities of the new Fox.
Housing our news, sports and broadcast franchises, This company is already a leader many times ever. Fox News is a long time leading cable news network and more recently the number one cable network and probably the strongest brand in all of television. Fox Business is now the most watched business news channel. Fans look to Fox and Fox Sports as a long term home of important sports leagues like the NFL, the MLB and NASCAR and college conferences like the Big 10. And the Fox Broadcast Network and Stations Group are present in tens of millions of homes across the country providing Americans with live local news and sports.
Newfox's unique strategic advantages are reflected in its remarkable financial profile. He will be the leader in top and bottom line growth and generate robust cash flow further enhanced by tax attributes. You will hear more about from John in just a few moments. Finally, now I know a lot of you are wondering why did the Murders come to such a momentous decision? Are we retreating?
Absolutely not. We are pivoting at a pivotal moment. We have always made a commitment to deliver more choices for customers, provide great storytelling, objective news, challenging opinion and compelling sports. Through today's announcements, we are proud to recommit to that promise and enable our shareholders to benefit for years to come through ownership of 2 of the world's most iconic, relevant and dynamic media companies. They will each continue to be leaders in creating their very best experiences for consumers.
So now I would like to turn over to John to give you some specifics on the overall transaction for our shareholders. Thank you, John.
Thanks, Rupert, and good morning, everyone. I'd like to echo Rupert's comments on how excited we are to announce this value enhancing transaction for our shareholders. So let me provide a brief overview of the integrated transactions that we are announcing today. First, 21st Century Fox will split a group of related live content most relevant to viewers. The businesses that will comprise New Fox include Fox News, Fox Business, the Fox Broadcast Network, both entertainment and sports, the owned and operated Fox Television Stations, FS1 and FS2 and the Big 10 network.
In addition, New Fox will own the Los Angeles studio lot and some other small investments. Now at a high level and using 2017 financials as a pro form a reference, Newfox would have approximately $10,000,000,000 of annual revenue and $2,800,000,000 of EBITDA, which includes an estimate of incremental public company, corporate and shared costs. Newfox will also have a strong investment grade balance sheet, conservative delevered with a maximum of $9,000,000,000 of new gross debt, $7,500,000,000 of net debt and under 3 times net leverage out of the box. New Fox will be positioned to continue to deliver consistent growth driven by affiliate and retrans revenue growth and strong advertising demand for its news, sports and entertainment product. We also expect robust free cash flow generation at New Fox from the strong conversion of earnings into free cash flow, enhanced by the substantial tax benefits New Fox will have at the date of closing.
Allowing it to be opportunistic in its approach to maximize both near term and long term shareholder value. We expect that Newfox will initially pay a dividend at least at the yield of 21 CF today and that it should grow at least in line with the overall earnings growth of the business over time. The separation of New Fox from 21st Century Fox will be a taxable spin transaction at the corporate level of 21 CF and the tax incurred will be payable by Disney. But to offset this tax liability, on the date of the separation, NuFox will pay a cash dividend to merge GoFox equivalent to the value of the tax liability up to $8,500,000,000 and subject to a downward adjustment based on the actual tax liability at the time of closing. New Fox will then benefit from a step up in its deductible tax basis, allowing it to appropriately exempt a significant portion of its income from taxes for the next 15 years.
In the second part of the integrated transaction, all of the remaining FOX businesses inside of the 21st Century FOX entity, which we'll refer to as Mergeco Fox, will merge with Disney. Under the terms of the agreement, upon the closing, 21st Century Fox shareholders will receive 0.2745 Disney shares for each Fox share they hold regardless of class. The exchange ratio is subject to adjustment for certain tax liabilities from the SPIN transaction. The transaction values MergeCofox Businesses at a total enterprise value of approximately $69,000,000,000 using yesterday's Disney closing price and including the assumption of all of 21CF's net debt. After the transaction closes, Fox shareholders will own approximately 25% of the outstanding shares of Disney and the Fox shareholders will also own all of the outstanding shares in New Fox in the same class proportion as they do now.
The integrated transactions will complete together and are subject to a number of conditions, including regulatory tax and shareholder approval, among others. And we'll keep you informed along the way as we make progress toward the closing. Now let me turn it over to Lachlan for some additional comments.
Thanks, John. To start, I would like to say that this transaction talent and of their accomplishments that we are able to transform this company into these 2 new entities, the merged business with Disney and the new Fox. I would like to thank each and every one of our colleagues for their work. Everyone should be very proud of what they have created. The logic behind the transaction is really simple.
The assets we are merging into Disney will bring that company new creative opportunities, established intellectual properties and global reach. Fox Film and Fox Searchlight with a combined 27 Golden Globe narrative originality of FX, our local sports networks and our thriving international channels and platforms like Hulu and Sky and the burgeoning star. Managed correctly, these assets should flourish under Disney ownership and drive shareholder return into the future. There is no doubt that the combined business will be a clear leader in entertainment content across all corners of the world. But while the Merge business is about scale, the new Fox is about returning to our roots as a solution to explore potentially disruptive distribution and monetization strategies.
This strategic strength when coupled with its strong balance sheet, robust cash flow profile and entrepreneurial DNA makes the potential for New Fox extraordinarily exciting. Over the next few months, we will be working to the leadership and management structure of the New Fox, something we will announce closer to closing. In the meantime, our motivation and focus from now until then is in getting the best outcome for our shareholders, for our creative partners and for our employees, many of whom have found this to be a very difficult time. Sometimes the right decisions are the hardest ones and this is no exception. In the end, the combined Disney and Fox assets and the creation of new Fox assets.
Thanks everyone for joining us this morning. I just want to take just a minute to talk to a little bit of the logic of why we're moving forward with these transactions, so complacent. And this transaction, this creation of 2 new ventures for our shareholders is a game changer like no other. We committed some years ago to simplifying our operating model and our portfolio. I want to be clear with you that this integrated transaction reinforces that.
This is all about investing in brands, in storytelling and in our capabilities. These investments are demonstrated in the birth of the Fox Network and Fox News and the extraordinarily important mission driven work of National Geographic Partners and in our unparalleled investment in media and the world's largest democracy, India. This commitment is also witnessed in our decades long project to provide choice and innovation to customers of Sky across our European markets and in our genuine zeal for investing in and developing the most challenging and innovative storytellers in the U. S. This transaction amplifies and enhances everything that we've been up to and accelerates our mission as a plurality and competition machine everywhere we operate.
The new Disney with deeper, better and more extensive direct to consumer services around the world, extraordinarily creative talent and a zeal for innovation is well positioned to be the pacesetter in a dramatically competitive global marketplace that benefits customers and shareholders alike. The new Fox, with a unique focus on live and a brand that matters for consumers and from a financial perspective, we expect New Fox to have industry leading growth and very robust free cash flow generation with an attractive dividend and significant financial flexibility going forward. I need to mention one more thing for the avoidance of doubt. We're totally committed to closing the proposed transaction to acquire the balance of Sky shares that we do not already own. We expect that transaction to pass regulatory muster before the end of this financial year, as we've said in the past.
We believe it financially versus the status quo. And no doubt, it delivers on our unrelenting focus on shareholder value. As a result, the integrated transactions have the unanimous support of our board and we look forward to closing these transactions in due course. I'll hand it back to my father to close.
Thank you, John, Lachlan and James. So as you can see, we are energized with the prospects of the 2 new companies we're introducing today and permanently believe that these transactions will unlock real value for consumers and for the future customers of both entities, especially during the time of change. For all of our colleagues and wonderful creative talent with whom we partner, we believe these transactions provide for you unprecedented opportunity to do the very best work of your lives. And importantly, for 21 CF and Disney shareholders, the value we're unlocking is plain to see. We've now established 2 dynamic companies, each of which is better positioned to deliver distinctive experiences to consumers and succeed well into the future.
Thank you very much. With that, we're very happy to take some questions.
Operator, we'd be happy to take
a few questions from the investment community.
Certainly.
And first, go to the
line of Jessica Reif with Bank of America Merrill Lynch. Please go ahead.
Thank you. Here's my one long question. You know it's coming. So the first question is, there's been a lot of speculation that Fox and News Corp. Will recombine.
If yes, can you discuss if that's what you are thinking, can you discuss the rationale? On the Sky deal, how do you expect the regulators to take into account the pending Disney deal? And then finally on FBC, how do you think the strategy will change without a production company as part of the business? Thanks.
I could just answer that. We haven't thought about combining with News Corp. And if we do, it's way, way into the future. Regulator, we think this is the best option. We see really no problems.
And I think it should be fine. You never know what Justice comes up with. And as for FBC, we can make our own programs. We'll be buying people like Warner Brothers and Sony will be looking to us to buy programs. So I think we're in a strong position for buying, for getting all the programs we need.
And Jessica, it's James here. Just to clarify, on the Sky deal, the regulatory question there, we expect the Sky transaction to close on a timetable that we've already laid out for everyone, and that the UK authorities there will continue on their path as they are today and that should close prior to the close of this transaction with Disney.
Just if anything goes wrong, the existing shares in Sky will still go to Disney. It will be up to them what to do.
Thank you.
Thank you, Jessica. Operator, next question please.
We'll go to Ben Swinburne with Morgan Stanley. Please go ahead.
Thanks. How do you view the growth rate and the pricing power of your cable network portfolio now that you're removing FX in that geo? Does it enhance it? Does it work against it as you deal with new and existing distributors? And then John, can you help us with the basis step up?
Is there any way for you to help us quantify that or if you valued it on an NPV basis? It sounds significant, but any help for us to think about sizing that would be great. Thank you.
I would say there's no we're in a very stronger position if anything with the FTC, with its NFL and particularly Fox News. Fox News is something they just no one can afford to drop. Charlie Irvin tried it for 6 weeks and not 150,000 customers. I think it's we've shown, we've lost some of our stars and lost none of our audience. So it's it's extraordinary.
So that's fine. John, you took it.
Yes. Ben, just on the tax side, while it's all subject to final calculations and everything, I think it's safe to assume that somewhere around $1,500,000,000 of each year's taxable income will be sheltered through the deductible basis for 15 years.
That's very helpful. Thank you.
Thank you, Ben. Operator, next question please.
We'll go to Michael Nathanson with MoffettNathanson. Please go ahead.
Thanks. I have 2 ones on sports for all 3 of you guys. Firstly, can you walk me through why the RSNs were sold given the focus you have on sports and the remaining assets? So what was the thinking of divesting the RSNs? And then 2, you have an NFL deal coming down the road and a baseball deal coming due.
How do you think about the scale of your businesses when those negotiations start? I mean, if there are major increases in sports rights, it could be a problem on profitability. So talk me through how you see the future sports rights too.
Well, I
think the sports rights will dictate what we have to ask for subscriptions. I think we're in good shape there. There's several years to go on the NFL. The MLB is up next year. Is that right, James?
It's a little bit longer than that.
Okay. Sorry.
Quite a bit. Yeah. So I think, Michael, if I may, on the RSNs and the inclusion in this, I think when we looked at the mix of businesses and structuring this transaction, we're really mindful of what the fit was for each business. Obviously, both the new Disney and the new Fox are in the sports business. And it was really a question of where the best fit was and also what was really going to generate the most value for shareholders and how that worked.
So that was really a lot of our thinking there. And with respect to those contracts, I mean the NFL and the MLB rights have a little ways to go both into 2021 and then 2023, I think. So we have pretty good visibility of that. And I think when you look at the and we'll be competing for rights on an ongoing basis in what has always been a competitive market for rights.
I would just say that if we kept RSMs, it would have added a huge tax burden to the spin. And meanwhile, we've got to take over premium 12.5 times their earnings. So it was I think it's a good deal.
Thanks, Rupert. Thanks, James.
Operator, can
we have the next question please?
And we'll go to Stephen Cahall with RBC. Please go ahead.
Yes. Just one for me. It sounds like you'll have a lot of free cash flow to allocate back to the business or to shareholders. I was wondering if you could talk maybe a little bit about how you think about any potential inorganic growth strategy. Do you like the station footprint the way it is?
Are there opportunities to add more maybe digital assets with Fox News? So I think you can talk about maybe the strategic use of the balance sheet.
Well, yes, as far as the stations, there will be opportunities that will depend on the price. Certainly, if we add more, it will give us greater strength in getting clearances. But it's going to have a free cash flow, we expect, at least $2,000,000,000 a year as is new folks. And we'll start modestly the dividend size and then we'll see from there. I mean, what comes up.
We'll be in a mood to expand and do new things. And we'll have the ability. There'll be somewhat under leverage very quickly.
No, no. Reed, do you want to move on to the next question?
Okay. And at this point, I think we have time for one last question.
That will be from Doug Mitchelson with Credit Suisse. Please go ahead.
Thanks so much. I think it's going to be important for investors to understand the digital or direct to consumer strategy of the new Fox. I mean, for example, you've talked a lot about the need to evolve TV advertising. You've considered transactions to increase strategic flexibility for the TV stations. And it seems like you're going to have a greater exposure to both those revenue streams.
So to the extent Lachlan said you're going to be positioned to pursue disruptive distribution monetization strategies in the context of the new Fox. Can you give us any sense of what those might be? And ultimately, what the digital strategy is for the new Fox? And then maybe for John, I'm just curious if the Fox broadcast deal with Hulu was extended as part of the negotiations or will be extended as part of the deal? Thank you.
Lachlan, do you want to take?
Yes. So, thanks for the question. Look, the digital strategy for the new Fox is really the same as the digital strategy for the old Fox. And we've been pretty open for some time in saying that we believe that all of our content and channels will ultimately have a direct to consumer distribution element as well as a traditional distribution combined. And so and that's very much the same here.
So over into the new FOX to enable that.
That's great.
And on the Hulu side?
Hulu is part of the deal is an element in Hulu. I don't think any of the parties want to discuss any of the owners and any of the partners discuss the details of it.
And Lachlan, just to be clear, you're saying the technology that Fox has been building for direct to consumer stays with the new Fox, that's what you're saying?
That's correct.
Oh, yes. Okay. Thank you very much.
Thank you, Doug, and thank you everyone for joining today's call. If you have further questions, please feel free to give Mike Petrie.
Starts today at 11 am Eastern will last until December 28 at midnight. You can access the replay at any time by dialing 800 475-6701 or 320-365-3844. The access code is 439 113. Those numbers again, 800-475-6701 or 320-365-3844. The access code 439,113.
That does conclude your conference for today. Thank you for your participation. You may now disconnect.