00:00So what Fox wants, Scarlett, is exposure to digital media.
00:04So Fox is one of those legacy media companies that really kind of doubled down on live TV.
00:11And if you look at their revenue mix right now, they have about 90 percent exposure to the linear TV
00:16ecosystem.
00:17You compare that to some of their peers, even a Paramount Skydance or a Warner Brothers Discovery, which are exposed
00:23about 50 to 55 percent.
00:24So Fox definitely one of the most heavily exposed.
00:28They've, you know, they've played it pretty safe.
00:30So they've stayed away from the really expensive streaming wars when everybody was, you know, spending billions, tens of billions
00:36of dollars on content to just kind of get streaming subscribers.
00:40They stayed away from that, but they've always kind of been shoring up capital to make this big play into
00:46digital, you know, advertising, into digital streaming.
00:50And that's exactly what they're doing today with this Roku acquisition.
00:54It helps them build up their digital advertising business.
00:56And it really helps them win the streaming war in a very unique way because Roku is a streaming aggregator.
01:04So Roku gets paid no matter which streaming service wins.
01:08And I think that's really a unique benefit here for Fox.
01:11I have to admit, Keith, I'm surprised that the stock is down as much as it is down 16 percent.
01:15Why do you think that is?
01:17So one thing, Paul, is that this is a pretty big deal.
01:21So if you just look at Fox's, you know, market cap, for instance, it's close to about 25 billion.
01:26This deal is, you know, the equity value of the deal is about 25 billion.
01:30So definitely a really, really big size deal from a size perspective.
01:35And more important, I mean, Fox has always been very, very good in terms of its balance sheet management.
01:41They've had, you know, a pristine balance sheet, very low levels of debt, have always committed to, you know, a
01:48strong capital returns program and stock buybacks.
01:51And I think people are a little bit nervous right now because they are going to be taking on quite
01:56a sizable debt load with this transaction, more than 12 billion dollars in debt.
02:01And while they've promised to kind of maintain their capital returns, I think the street is still a little bit
02:06nervous.
02:07Is there any reason to think that regulators might have any objections to this?
02:12And I ask thinking that it's probably not because Fox is pretty close to the Trump administration.
02:17And this is an administration where, you know, friends get good treatment.
02:22Absolutely.
02:22I totally agree with you there, Scarlett.
02:25And I think, you know, the Murdochs obviously have this really close relationship with the president, with the current administration.
02:32The only thing that I would raise here is there is a little element of vertical integration.
02:37So Fox obviously owns content in terms of, you know, news, in terms of live sports, access to a lot
02:44of live sports properties.
02:47And with Roku, it's really more of distribution, right?
02:50Roku has access to 100 million global streaming households, over 50 percent of the U.S. broadband households.
02:58So that really gives them that whole distribution arm.
03:01And so regulators could make a case that this becomes, again, a case like, you know, Comcast, where you have
03:06the cable business and you have content.
03:09And so, you know, whether there need to be any concessions or whether, you know, regulators are going to scrutinize
03:14it a little bit more closely.
03:17This is kind of, I would say, the coming out party, if you will, for Lachlan Murdoch a little bit
03:22here.
03:22What's the call there?
03:24What's the thought there?
03:25Is this a management team that can pull off such a big deal?
03:29I think they can.
03:31They've been very, very measured, Paul, as you well know, in terms of, you know, acquisitions, in terms of M
03:36&A, in just terms of general strategy.
03:38But we know that they've always been itching to do a deal.
03:41You know, they've done small deals much more quietly, and they've had this very eclectic collection of different assets, but
03:50really kind of spreading their bases a little bit.
03:53So they went out and they got all of these, you know, stakes and a lot of sports betting assets,
03:59again, kind of identifying all the growth of, you know, pockets, if you will.
04:03And so I think, you know, this deal, obviously, it's a huge deal.
04:07They've considered it over a long period of time.
04:10And I think they feel like this, you know, with the purchase of Roku, obviously, they do get to supercharge
04:16their own advertising business pretty substantially.
04:20But then again, you know, they also get economics from any streaming platform, right?
04:26Because Roku gets paid, they're pretty much like an Apple store.
04:29So they get that 30, 35% cut, no matter which streaming service you subscribe to.
04:35So I think that, you know, Fox was obviously trying to get a part of those owners' economics as well.
04:41Is there any reason to think that someone else might come in with a higher bid?
04:44Could this result in any kind of bidding war?
04:47So we think, so we just ran some numbers, Scarlett, and we think that, you know, the Roku, I mean,
04:53the number is actually a little bit underwhelming.
04:56So yes, Fox is paying about a 35% premium to where Roku was trading prior to all of this
05:02M&A news.
05:03But if you just compare some of the Roku profitability numbers, so just this quarter or just a few months
05:11ago,
05:11they started disclosing their advertising revenue as well as their subscription revenue.
05:15And what was more interesting than the breakout of the revenue itself was the gross margin.
05:19So you look at advertising revenue, for instance, it's a 60% gross margin business, which is really, really a
05:25profitable business stream, a profitable revenue stream.
05:28And then you kind of apply some of the multiples that peers are trading at.
05:31I mean, whether it's a Google or a Meta or even a Netflix or Spotify on the subscription side, and
05:36we think it's actually slightly undervalued.
05:38So maybe almost 30% undervalued to some of where those peers are trading.
05:42And I think that's what the market is slightly disappointed about today, both the price as well as the fact
05:47that this was not 100% cash deal.
05:50So only 60% of it is cash.
05:52The remaining 40% is being paid by Fox stock, Class A stock.
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