FOX - Fox slides News Corp. jumps as companies confirm exploring combination

Against a broadly higher stock market Monday morning, Fox has tumbled near a two-year low - ( NASDAQ: FOX ) -5.8% , ( NASDAQ: FOXA ) -7% - after the company and News Corp. (( NASDAQ: NWS ) +6.1% , ( NASDAQ: NWSA ) +6.7% ) confirmed they were looking at recombining after nearly a decade as separate companies .

The current News Corp. (parent of Dow Jones and publisher of The Wall Street Journal, among ownership of other news organizations and publisher HarperCollins) and Fox (owner of the Fox broadcast network, Fox News, Fox Business and Tubi streaming) were split up in 2013, as a stock transaction with what was then Twenty-First Century Fox. Later, Fox sold off its media assets to Walt Disney.

Meanwhile, Rupert Murdoch's family trust has kept a heavy hand on both companies, and owns about a 39% voting stake in News Corp. and a 42% voting stake in Fox.

The potential deal is being received with a lack of enthusiasm for the Fox side of the equation, with Morgan Stanley saying "The benefits of greater scale and modest cost synergies is in our view largely offset by increased complexity."

The idea of bulking up with News Corp. may be a reaction to Fox's low multiple, playing in a pay TV market where secular headwinds are building, analyst Benjamin Swinburne said.

That's meant Fox shares have been capped at 5-6x enterprise value-to-EBITDA for some time, he says, and "A recombination with News Corp would not improve the US linear TV business where Fox derives most of its earnings." Meanwhile, News Corp. remains focused on asset portfolio optimization after some "healthy" appreciation in the real estate businesses.

He's trimming first-quarter EBITDA at Fox to factor in programmatic advertising headwinds at Fox News, and expenses in the Television segment.

Credit Suisse has cut FOXA to Neutral, noting that Fox's outperformance of the Media sector has been built on operational simplicity and transparency; confidence in growth based on pricing power as a pure-play sports/news operator; high free cash flow with minimal streaming investments; and U.S.-only operations.

But several of those factors have been blunted as the macro market has turned against advertising exposure, analyst Doug Mitchelson says.

"Thus, the near-to-midterm investment case increasingly relied on favorable allocation of its $5B of cash (vs. its $17B market cap)," he says. The confirmation that Fox is seeking to recombined with News Corp. "undercuts this remaining investment pillar; we downgrade to Neutral."

Activist investor Irenic Capital Management is reportedly pushing for News Corp. to split off its real estate listings business from its media operations .

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