EQUITY RESEARCH
28 March 2012
U.S. MEDIANew National Sports Network CouldIncrease Competition for Sports Rights
Earlier this afternoon, Bloomberg reported that News Corp is “taking steps to start anational US sports network on cable television” (“News Corp. Said to Plan U.S. SportsNetwork to Rival ESPN,” 3/28/12). If this were to occur, we believe it could serve as anadditional source of growth for News Corp’s cable networks business, and could putupward pressure on sports rights costs for sports programmers like ESPN. Four points:
1) Value of sports content continues to increase
.
Sports programming continues togrow in value as: (1) ratings for sports events are growing and relatively predictable; (2)ad buyers pay premium prices as DVR penetration increases; and (3) sports lends itself well to mobile, multi-platform, and 3D consumption. ESPN’s hefty affiliate fees of $4+per subscriber per month are a reflection of this value, and dwarf other cable networks,most of which earn less than $1/subscriber.
2) Sports programmers have most leverage in affiliate negotiations, in our view
. Aswe wrote in our 1/27/12 note, “Who Bears the Burden of Higher Sports Rights Costs,”we believe sports programmers have the most leverage in their discussions with themulti-system operators, and non-sports programmers could be at a disadvantage incompeting for affiliate fee increases in what is increasingly a zero-sum game.
3) Sports programming becoming increasingly competitive.
While we continue tobelieve ESPN is best positioned to compete in sports programming, we have heldconcerns about the space becoming more crowded, particularly in light of speculationthat NBC Sports is becoming more acquisitive with respect to sports content. ESPN hasmaintained that it will remain disciplined and refrain from overpaying for rights, but if News Corp ultimately enters the space, at the very least it would increase the cost of doing business for ESPN given more bidders for sports content. Over the next fewyears, two of the more marquee/valuable TV contracts that could become availableinclude Major League Baseball and a potential carve-out of Thursday Night NFL games.
4) New sports network could represent another leg of growth for News Corp.
According to the Bloomberg report, a final decision to move forward has not beenmade, but one alternative would be for News Corp to rebrand its “Fuel TV” channel asthe new national sports network and potentially begin service by the end of this year.It’s still too early to know whether the network will be successful, but with subscribergrowth flattening out in the mature US pay-TV market, a new under-distributedchannel would be a source of domestic growth for the cable networks business.
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies coveredin its research reports. As a result, investors should be aware that the firm may have a conflict of interestthat could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE5.
INDUSTRY UPDATEU.S. Media2-NEUTRAL
Unchanged
U.S. MediaAnthony DiClemente, CFA
1.212.526.1341anthony.diclemente@barcap.comBCI, New YorkBo Tang1.212.526.9297bo.tang@barcap.comBCI, New York
 
Barclays | U.S. Media
28 March 2012
 
2
 
COMPANY SNAPSHOT
News Corp.
U.S. Entertainment
Income statement ($mn)2011A2012E2013E2014ECAGR
Total Revenue$33,402$34,487$36,160$37,9674.4%Stock Rating
2-EQUAL WEIGHT
Segment Adj. EBITDA$6,258$6,899$7,543$8,1589.2%Sector View
2-NEUTRAL
Segment Adj. EBIT$4,975$5,679$6,323$6,93811.7%Price (28-Mar-2012)
$19.74
Adjusted EPS$1.16$1.43$1.72$1.9619.0%Price Target
$22.00
Diluted shares (mn)2,630.32,488.12,313.12,243.5(5.2%)Ticker
NWSAY/Y growth (%)Investment case
Total Revenue1.9% 3.2% 4.9% 5.0%Segment Adj. EBITDA19.9% 10.2% 9.3% 8.2%Segment Adj. EBIT11.6% 14.1% 11.3% 9.7%Adjusted EPS9.7% 23.4% 19.7% 14.2%FCF per Share(1.8%)(14.0%)41.0% 11.3%
Segment EBIT ($mn)CAGR
Flimed Entertainment$927 $1,071 $1,022 $1,0012.6%Television$681 $813 $886 $1,00713.9%
Upside case$25
Cable Networks$2,760 $3,278 $3,781 $4,28815.8%Sky Italia$232 $269 $284 $2998.8%Publishing$989 $721 $630 $623NAOther($614)($474)($280)($280)NA
Margin and return data (%)
EBITDA Margin18.7% 20.0% 20.9% 21.5%EBIT Margin14.9% 16.5% 17.5% 18.3%
Downside case$16
ROIC6.6% 7.5% 8.5% 9.0%ROE11.4% 12.7% 14.6% 15.2%
Select balance sheet data ($mn)CAGR
Cash and equivalents$12,680$9,165$9,866$10,138(7.2%)Total assets$61,980$59,669$60,370$60,642(0.7%)Total debt$15,495$15,454$15,454$14,954(1.2%)Total liabilities$32,474$33,253$32,326$30,820(1.7%)
Upside/downside scenarios
Shareholders' equity$29,506$26,417$28,044$29,8220.4%
Select cash flow data ($mn)CAGR
Cash flow from operations$4,471$3,807$4,686$5,0193.9%Capital expenditures($1,171)($1,123)($1,167)($1,222)NAFree cash flow$3,300$2,685$3,519$3,7974.8%Share repurchases$0($5,000)($2,000)($2,000)NA
Valuation and leverage metrics (Calendarized to December)
EV/EBITDA6.7x 5.9x 5.3x 4.9x
Source: FactSet
P/E (adj)15.2x 12.5x 10.7x 9.8x
NWSA EBIT & EBIT Margin
FCF yield5.9% 6.6% 8.1% 8.9%Net debt/EBITDA0.7x 0.8x 0.7x 0.5x
Select operating metrics (Y/Y growth)
Domestic Cable Affiliate Fees10.4%10.0%10.1%10.0%Domestic Cable Advertising16.1%9.4%8.2%6.9%Television EBIT209.5%19.4%8.9%13.7%Filmed Entertainment EBIT(31.3%)15.5%(4.6%)(2.0%)
Source: Company data, Barclays Research.Note: FY ends in June.
Why2-EW?
StrongaffiliateandadvertisinggrowthfromtheCableNetworksandincreasingretransfees/reversecompfromTelevisionbusinessshouldsupportstrongtop-linegrowthoverthenextfewyears.However,weremainEWgivenheadlineriskand concerns around capital allocation.Upsidetoourestimatescouldcomefromafasterthanexpectedeconomicrecovery,incrementalreturnofcapital,andadditionaldigitaldistributiondeals.Ourupsidecaseof$25isbasedonCY2012EP/E multiple of 15.8x.Shouldtheeconomydeterioratefurther,theremaybedownwardpressuretoouradvertisingestimates.Poorcapitalallocationdecisionsandheadlineriskcouldalsosignificantlyweighonthemultiple.Ourdownsidecaseof$16isbasedonaCY2012EP/Emultiple of 10.1x.
 
$3,000$4,000$5,000$6,000$7,0002011A2012E2013E12.0%14.0%16.0%18.0%20.0%Segment Adj. EBITEBIT Margin
DownsideCase
$16(-18.4%)
PriceTarget
$22(12.1%)
UpsideCase
$25(27.4%)611162126314-Apr-1127-Mar-12
 
DownsideCase
$16(-18.9%)
PriceTarget
$22(11.4%)
UpsideCase
$25(26.6%)611162126314-Apr-1127-Mar-12
 
 
Barclays | U.S. Media
28 March 2012
 
3
 
COMPANY SNAPSHOT
Walt Disney Co.
U.S. Entertainment
Income statement ($mn)2011A2012E2013E2014ECAGR
Total Revenue$40,893$42,400$44,596$47,0054.8%Stock Rating
2-EQUAL WEIGHT
Segment Adj. EBITDA$9,751$10,706$11,741$12,8499.6%Sector View
2-NEUTRAL
Segment Adj. EBIT$8,825$9,746$10,766$11,89110.4%Price (28-Mar-2012)
$43.51
Adjusted EPS$2.54$2.98$3.45$3.9816.2%Price Target
$44.00
Diluted shares (mn)1,909.31,793.41,734.21,671.1(4.3%)Ticker
DISY/Y growth (%)Investment case
Total Revenue7.4% 3.7% 5.2% 5.4%Segment Adj. EBITDA14.9% 9.8% 9.7% 9.4%Segment Adj. EBIT16.3% 10.4% 10.5% 10.4%Adjusted EPS19.2% 17.2% 15.8% 15.6%FCF per Share(21.7%)(5.1%)52.5% 7.0%
Segment EBIT ($mn)
Broadcasting$913 $862 $960 $1,0534.9%Cable Networks$5,233 $5,888 $6,335 $6,9459.9%
Upside case$48
Parks & Resorts$1,553 $1,786 $1,981 $2,19412.2%Studio Entertainment$618 $630 $717 $7376.0%Consumer Products$816 $865 $942 $1,0027.1%Interactive Media($308)($285)($170)($41)NA
Margin and return data (%)
EBITDA Margin23.8% 25.2% 26.3% 27.3%EBIT Margin21.6% 23.0% 24.1% 25.3%
Downside case$36
ROIC9.9% 10.6% 11.2% 11.8%ROE12.8% 14.0% 14.8% 15.3%
Select balance sheet data ($mn)CAGR
Cash and equivalents$3,185$2,316$2,689$3,169(0.2%)Total assets$72,124$75,479$78,367$81,9364.3%Total debt$12,999$14,386$14,386$14,3863.4%Total liabilities$32,671$34,454$34,454$34,4541.8%
Upside/downside scenarios
Shareholders' equity$37,385$38,859$41,747$45,3166.6%
Select cash flow data ($mn)CAGR
Cash flow from operations$6,994$7,369$7,644$8,304NACapital expenditures($3,559)($4,308)($3,131)($3,653)NAFree cash flow$3,435$3,061$4,513$4,651NAShare Repurchases($4,993)($3,800)($3,914)($3,992)NA
Valuation and leverage metrics (Calendarized to December)
EV/EBITDA9.8x 8.6x 7.6x 6.7x
Source: FactSet
P/E (adj)16.4x 14.1x 12.2x 10.6x
DIS FY EPS & EPS Growth
FCF yield4.2% 4.6% 6.2% 6.6%Net debt/EBITDA1.0x 1.1x 1.0x 0.8x
Select operating metrics (Y/Y growth)
Cable Nets. Affiliate Fees9.2%10.2%6.7%7.9%Cable Nets. Advertising17.2%6.8%6.4%4.9%WDW Attendance1.2%3.8%2.5%2.3%WDW Revenue per Visitor7.0%7.4%4.0%3.9%
Source: Company data, Barclays Research.Note: FY ends in September.
Why2-EW?
WeareconstructiveonDISanditsbusinessmodel,butareneutralonsharesgivenaplateauingofpositiveEPSrevisionsandadecelerationinlonger-termrevenueandESPNmargingrowth.Macrouncertaintycouldlimitupsideto Parks results.Iftheeconomyrecoversfasterthanexpected,therecouldbeupsidetoourestimates,especiallyattheCableNetworksandParksbusinesses.Ourupsidecaseof$48isbasedonCY2012EP/Emultipleof 15.4x.Shouldtheeconomydeterioratefurther,theremaybedownwardpressuretoourestimatesgivenDisney'scyclicalexposure(throughadvertisingandtheParks).Ourdownsidecaseof$36isbasedonaCY2012E P/E multiple of 11.7x.
 
$4,000$6,000$8,000$10,000$12,0002011A2012E2013E18.0%20.0%22.0%24.0%26.0%28.0%Segment Adj. EBITEBIT Margin
DownsideCase
$36(-14.7%)
PriceTarget
$44(4.1%)
UpsideCase
$48(13.6%)14243444544-Apr-1127-Mar-12
 
DownsideCase
$36(-17.2%)
PriceTarget
$44(1.1%)
UpsideCase
$48(10.3%)14243444544-Apr-1127-Mar-12
 
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