Twenty-First Century Fox, Inc. (FOX) is among the newest mammoth companies in America, having been spun off in 2013 from the late multinational conglomerate News Corporation. That company wanted to separate its entertainment and publishing businesses, which it accomplished by moving all the entertainment to 21st Century Fox and reconstituting the latter.

Its name hearkens back to that of legendary movie studio 20th Century Fox. Post-2000, 21st Century Fox operates in three main business segments: cable network programming, television, and filmed entertainment. However, its acquisition by Disney expected for closing in 2019 will change that. In early November of 2017, reports emerged that 21st Century Fox had been holding talks with Disney to discuss potentially selling off some of Fox's assets, including their TV and filmed entertainment content, such as the movie and television studios, ownership shares in British network Sky, and Fox's 30% share in streaming service Hulu, which, when combined with Disney's 30% share, would make Disney the majority shareholders. Fox would retain Fox News, their broadcast network, and sports channel FS1, among other assets. In July 2018, the deal was approved by shareholders and now moves on to regulatory approval around the world. Disney will pay over $50 billion for the company, and Fox shareholders will be able to exchange their shares or receive $38 each. The evolution of the acquisition and subsequent merger is ongoing with many moving parts. Disney will acquire assets of Fox, but certain assets will also be divested into a “New Fox,” which is expected to focus on television.

Profit Center: Your Couch

21CF’s cable network television business is at least passingly familiar to any American with cable or satellite TV. They include Fox News Channel - the most popular cable news network famed for its conservative slant, Fox Business Network - the company’s analog to CNBC or Bloomberg Television and cable networks FX, FXX, and the Fox Sports empire of regional and national sports channels. Twenty-First Century Fox also owns the National Geographic Channel, both the U.S. and international versions. The company also has a huge presence in Western Europe, Latin America, Oceania, and Asia, operating various movie channels and sports channels throughout said parts of the world.

As distinguished from cable network programming, 21st Century Fox’s television segment refers to the ownership and operation of television stations. The company owns 28 stations in the United States, including two apiece in the nation’s three largest cities: New York, Los Angeles, and Chicago. 

A couple of dozen television stations might sound like a relatively modest list of assets. After all, what’s a station but a building with a handful of satellite dishes to receive network programming, plus a local news division? It’s not a rhetorical question. The answer is a license to print money. Television stations in major markets can command prices upward of $750 million.

The television segment also includes the Fox Broadcasting Company itself, parent to the Fox Network, better known as the United States’ only new national broadcast network founded in the last 60 years. 

Own the Outlet, Own the Content

As for filmed entertainment, that includes movie production and distribution, under the 20th Century Fox Film banner. The segment also entails other movie brands, among them Fox Searchlight Pictures, which distributes special-interest and independent films. Also, under filmed entertainment is television programming, TV production, and syndication & distribution. Under the name 20th Century Fox Television, this is the department tasked with producing Empire, The Simpsons, and Brooklyn-Nine-Nine, along with other shows broadcast on the Fox Network. By the way, there’s no rule that prohibits a company affiliated with one network from producing shows for another, which is how 20th Century Fox Television can produce successful shows for ABC (Modern Family, Fresh Off the Boat) among other networks. Also, 20th Century Fox Television’s sister company, 20th Television, licenses programs for syndication. Another related company, Fox Television Studios, produces yet more shows for more networks (USA Network, Independent Film Channel, etc.). Finally, this division owns the Shine Group, which produces and distributes programs for viewers in the United Kingdom, Germany, and elsewhere.

The company also owns, or at least owns the right to distribute, several thousand movies and television episodes. If your local UHF outlet broadcasts The Sound of Music or Star Wars: A New Hope, Fox gets a cut. (Fox owns the rights to the original Star Wars "in perpetuity," probably because George Lucas was so desperate to get his movie made in 1977 that he didn't even look at the fine print. Disney owns all the other Star Wars films.) The same goes for many television series, even including vintage ones that predate the company’s founding by decades (M*A*S*HThe Mary Tyler Moore Show, etc.).

Which takes us to Direct Broadcast Satellite Television. In the United States, there are only two direct broadcast satellite television operators of significance: DirecTV (DTV) and Dish Network Corp. (DISH). In this regard, 21st Century Fox has little presence in its country of origin. Instead, its operations are concentrated in Italy (Sky Italia), Germany, and Austria (Sky Deutschland). It also has a 39% ownership stake in Sky, the United Kingdom’s primary TV provider – which has now been bid to Comcast. 

That’s 21st Century Fox’s biggest equity interest, but not its only one. Not far behind is the company’s one-third interest in Hulu, the American online video service it shares with the parent companies of ABC and NBC. FOX also has a large interest in an Indian satellite TV firm (Tata Sky).

All that accounts for an empire of entertainment, but where does the revenue come from? FOX lists four major streams, three of them almost equal in their contributions to the income statement: affiliate fees, content, and advertising. Subscriptions run a somewhat distant fourth.

Revenue From Every Angle

As for affiliate fees, that's the money that television stations pay for the privilege of receiving 21st Century Fox programming. Neither KTTW Sioux Falls nor KRIV Houston gets to broadcast Fox shows to its viewers free of charge. Each Fox-affiliated station around the United States — and there are close to 200 of them — scratches a substantial check to be able to fill up its schedule with dozens of weekly hours of network programming. Affiliate fees bring in a significant amount of money to 21CF and are very important to the company. These fees come from cable or satellite providers who pay to show 21st Century Fox content, and in turn, collect those fees from the viewer.

The more channels 21st Century Fox creates or buys, the more revenue it will generate through affiliate fees. In the last couple of years, 21st Century Fox bought controlling interest in the YES Network (a New York City-based cable network that shows New York Yankees and Brooklyn Nets games, among other sports programming) and created Fox Sports Asia, formerly ESPN Star, Asia’s largest cable sports network. 

Content, where sales are north of $7 billion, refers to the TV shows and movies that the many 21st Century Fox businesses create. As for advertising, that’s fairly self-explanatory. Advertising revenues are approximately $10 billion. Interestingly, the company attributes much of its advertising revenue increase to single events like the Super Bowl in which a 30-second commercial cost between $5 and $5.5 million. Fox also benefits from its rights with the National Football League to show the Super Bowl every third year.

The Bottom Line

Disney, 21CF, and the new FOX are a work in progress with regulatory approvals as the final hurdle for the merger and separation. Fox currently has two shares of stock trading on the Nasdaq: FOXA and FOX. One-year total return for FOXA and FOX are 74% and 77%, respectively. Fox has a free cash flow of $3.7 billion and an FCF to revenue ratio of 10.56%. Return on assets for the trialing twelve months is 8.29%. The company has a substantial amount of debt with a debt to capitalization of 71.75. Disney will be getting what many are calling the lean assets of the company overall, and only time will tell how the financials will be parsed out among the three end companies.