News Corp Strengthens Its Regional Presence With YES Network

News Corp’s (NASDAQ:NWS) announcement that it will acquire 49% equity stake in YES Network is yet another example of how the company is getting aggressive with its sports programming ambitions. ^[1] News Corp not only wants to expand into regional sports programming in the U.S. but also has plans to launch a national sports network to compete directly with Disney’s (NYSE:DIS) ESPN. In addition to this, the company has been pushing to expand into sports programming internationally. The recently announced deal with YES Network seems financially reasonable, and a right move given that the company hasn’t really had any major success in getting rights for big international events.

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News Corp Strengthens Its Roster Of Regional Sports Networks

ESPN’s success has encouraged media companies to make a significant push into sports programming. We estimate that ESPN brings roughly $10 to $11 billion in revenues for Disney on its high fee per subscriber and strong appeal to advertisers. As a result, it constitutes close to 45% to Disney’s value. It is going to be hard for the competitors to emulate its success given that ESPN has bagged long-term rights for many major sporting events. However, there will be good competition for the second spot. Fox and NBC are vying for this!

News Corp’s Fox Sports is a regional sports network. Regional sports networks are involved in broadcasting college and professional sports of local teams on regional level and besides Fox, NBC is another major player. Nevertheless, both Fox and NBC are also trying to get ahead in the race to build a national sports network to compete with ESPN. However, given that NBC was able to bag rights for Olympics and recently outbid Fox for English Premier League Soccer, it appears that Fox is lagging behind. ^[2] Therefore, the 49% stake acquisition in YES network will give Fox something to celebrate about and build on its strength, which is a regional sports network. Yes Network’s emphasis lies on games of New York Yankees and Brooklyn Nets.

The Deal Seems Financially Reasonable

Yes Network’s annual EBITDA is roughly $200 million. ^[3] Assuming capital expenditures of about 2% to 3% of EBITDA margins, as is the case generally for cable networks, and a 35% tax rate, we get rough free cash flow of about $125 million. Further, assuming a discount rate of 9.3% (same as that for News Corp) and average annual free cash flow growth of 5%, we get a value of around $2.2 billion for Yes Network.

If we assume a growth rate of 10%, this figure comes close to $3.2 billion. Given that News Corp is acquiring the stake at a valuation of $3 billion, the company may be expecting strong growth in free cash flow or better margins than we anticipate.  It may not be an unreasonable expectation given the high demand for sports programming that allows for healthy growth in subscriber fees as well as an improving advertising market.

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1. News Corporation And Yankee Global Enterprises Announce News Corporation’s Acquisition Of An Equity Stake In The YES Network, News Corp Press Release, Nov 20 2012 [↩]
2. NBC wins $250m rights to broadcast English Premier League in US, The Guardian, Oct 29 2012 [↩]
3. News Corp. to Acquire 49% of YES Network at $3 Billion Value, Bloomberg, Nov 21 2012 [↩]