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. If you should require any assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I will now turn the conference over to our 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, our executives made today regarding the benefits of the transactions, the anticipated timing of the transactions, and intended spinoff of certain of the company's businesses to create new Fox and the future business plans and prospects of the companies 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-K, other filings made with the Securities and Exchange Commission, including the Form 8-K filed this morning.
Please note that following communication is not an offer to sell or a solicitation of any offer to buy any securities or a solicitation of any votes for approval. We urge investors to read their registration statement on Form S-4 containing the joint proxy statement prospectus and all other relevant documents filed with the SEC or sent to stockholders as they become available, including the registration statement for new Fox when it becomes available. With that, I'm pleased to turn it over to Rupert.
Thank you, Reed. Good morning. 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. Four years ago, we separated our publishing and digital real estate businesses to unlock value and to focus on the opportunities for and potential of both News Corp and 21st Century Fox. With today's announcement, we launch 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 and a transformed Disney to chart a course across a broad frontier of opportunity. As Bob and his team explained earlier this morning, the combined Fox and The Walt Disney Company will be an impressive global operation, enabling us to deliver what consumers want: quality, storytelling breadth, and exchanges around the world. The parks and resort businesses of Disney is a leader, as is their consumer products business, forming a broad array of touchpoints with consumers. The scope of new Disney's combined storytelling customer directions, consolidated Hulu ownership, and 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, our investors 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 this 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 his passion and 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 know I am a newsman with a competitive spirit. When we launched Fox News, the consensus was that America had no appetite for another cable news network.
Well, they were wrong. When we launched the Fox Broadcast Network, we were written off by the conventional wisdom and told there was no need for a fourth major network. The same story holds true of Fox Sports 1. The new Fox is going to have an important lesson I learned in my career in media. Namely, content and news relevant to viewers will always be valuable. It is no wonder we're excited about the possibilities of the new Fox. Housing our news, sports, and broadcast franchises, this company is already a leader many times over. Fox News is a longtime 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 Ten. 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. New Fox's unique strategic advantages are reflected in its remarkable financial profile. It 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 Murdochs 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 two of the world's most iconic, relevant, and dynamic media companies. They will each continue to be leaders in creating the very best experiences for consumers. Now I would like to turn over to John to give you some specifics on the overall transactions 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. Let me provide a brief overview of the integrated transactions that we are announcing today. First, 21st Century Fox will split a group of 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 Ten Network. In addition, new Fox will own the Los Angeles studio lot and some other small investments. Now at a high level and using fiscal 2017 financials as a pro forma reference, new Fox would have approximately $10 billion of annual revenue and $2.8 billion of EBITDA, which includes an estimate of incremental public company corporate and shared costs.
New Fox will also have a strong investment-grade balance sheet, conservatively levered with a maximum of $9 billion of new gross debt, $7.5 billion of net debt, and under three 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 framework, allowing it to be opportunistic in its approach to maximize both near-term and long-term shareholder value.
We expect that new Fox will initially pay a dividend at least at the yield of 21CF 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 21CF, and the tax incurred will be payable by Disney. To offset this tax liability, on the date of the separation, new Fox will pay a cash dividend to merged co Fox equivalent to the value of the tax liability, up to $8.5 billion 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 merged co 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 merged co Fox businesses at a total enterprise value of approximately $69 billion 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, 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. 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 would never have been possible without the incredible work of our 22,000 employees and creative partners. It is frankly a huge recognition of their talent and of their accomplishments that we are able to transform this company into these two 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, inventive 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. While the merged business is about scale, the new Fox is about returning to our roots as 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 through 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. 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 compelling. This transaction, this creation of two 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, in the extraordinarily important mission-driven work of National Geographic Partners, and in our unparalleled investment in media in 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. 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. As you can see, we are energized by the prospects of the two new companies we're introducing today and firmly 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. Importantly, for 21 CF and Disney shareholders, the value we're unlocking is plain to see. We have now established two 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. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. In the interest of time, we ask that you limit yourself to one question. Once again, if you have a question, please press star one. 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. 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? On FBC, how do you think the strategy will change without a production company as part of the business? Thanks.
I can just answer that. We haven't thought about combining with News Corp, if we do, it's way into the future. Regulatory, we think this is the best option. We see really no problems. I think it should be fine. You never know what justice comes up with. As for FBC, we can make our own programs. We'll be buying people like Warner Bros. and Sony will be looking to us to buy programs. I think we're in a strong position of getting all the programs we need.
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. That the U.K. authorities there will continue on their path, as they are today, 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'll be up to them what to do.
Thank you.
Thank you, Jessica. Operator, can we have the next question, please?
We'll go to Benjamin 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 and Nat G eo? Does it enhance it? Does it work against it as you deal with new and existing distributors? 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 we're in a very stronger position, if anything, with FBC, with its NFL, and particularly Fox News. Fox News is something that just no one can afford to drop. Charlie Ergen tried it for six weeks and lost 150,000 customers. I think we've shown we've lost some of our stars and lost none of our audience. It's extraordinary. That's fine. John, you talk about.
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 a billion and a half dollars 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, can we have the next question, please?
We'll go to Michael Nathanson with MoffettNathanson. Please go ahead.
Thanks. I have two ones on sports for all three of you guys. Firstly is, can you walk me through why the RSNs were sold, given the focus you have on sports and the remaining assets? What was the thinking of divesting the RSNs? Then two, you have an NFL deal coming due down the road and a baseball deal coming due. How are you thinking 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. Talk me through how you see the future of 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. I think MLB is up next year. Is that right, James?
It's a little bit longer than that.
Okay, sorry.
Quite a bit. Yeah. 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 were 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. That was really a lot of our thinking there. 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. We have pretty good visibility of that.
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'd kept RSNs, it would've added a huge tax burden to the spin. Meanwhile, we got a take of at premium 12 and a half times their earnings. I think it's a good deal.
Okay, thanks Rupert. Thanks James.
Operator, can we have the next question, please?
We'll go to Steven 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? Anything you could talk about maybe the strategic use of the balance sheet?
Well, yes, as far as the stations, there will be opportunities. It will depend on the price. Certainly, if we had more, it would give us greater strength in getting clearances. It is going to have a free cash flow, we expect of at least $2 billion a year as this new Fox. We will start modestly the dividend size, then we will see from there what comes up. We will be in a mood to expand and do new things. We will have the ability. It will be somewhat under-leveraged very quickly.
Reed?
Go on, John.
No, Reed, do you want to move on to the next question?
Okay. At this point, I think we have time for one last question.
That will be from Douglas Mitchelson with Credit Suisse. Please go ahead.
Oh, 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. 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 greater exposure to both those revenue streams. 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? 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?
Yeah. Thanks for the question. Look, the digital strategy for the new Fox is really the same as the digital strategy for the old Fox. 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. That's very much the same here, so over into the new Fox to enable that.
That's great. 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.
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.
Great. Okay. Thank you very much.
Thank you, Doug. Thank you everyone for joining today's call. If you have further questions, please feel free to give Lowell Singer.
Starts today at 11:00 A.M. Eastern, will last until December 28th at midnight. You can access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 439113. Those numbers again, 800-475-6701 or 320-365-3844. The access code, 439113. That does conclude your conference for today. Thank you for your participation. You may now disconnect.