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Credit Suisse downgrades Fox, says reunion with News Corp. could hurt more than it would help


Fox ‘s potential reunification with News Corporation could actually be a set back from the stock’s value, Credit Suisse warned. Analyst Douglas Mitchelson downgraded the stock to neutral from outperform and cut his price target by 12% to $36, which implies an upside of 14%. He said the potential combination of Fox and News Corp. would be a bad investment — and even just the idea could hurt the stock. “The pivot seems a tacit admission of challenges for Fox,” he said in a Sunday note to clients. “Even if this merger does not ultimately come to fruition, the investment backdrop for Fox has been altered.” Fox announced late Friday that leaders of both organizations have separately begun exploring the combination of the two. No decisions have been made, the note said, nor have any changes been made to either’s operations. If a merger did happen, it would be a reunion of the two Rupert Murdoch-owned entities, which were broken up about a decade ago. News Corp. owns outlets such as The Wall Street Journal, MarketWatch and Barron’s. Fox sold off the bulk of its entertainment assets to Disney following the separation. Mitchelson said a merger would likely be approved with ease given the Murdoch Family Trust’s voting bloc in each. He said a stock merger could take place, or one could rein if there’s a perceived discount involved. But he said a merger, or even talk of one, shows Fox is struggling to use its $5 billion in cash to acquire and expand its $17 billion market cap. While he said patient investors might see some long-term value, he said News Corp. doesn’t solve Fox’s need for more video in streaming while pushing the stock’s value into discount territory. It can also signal Fox’s recognition that it its facing a dearth of stand-along value creation opportunities and more secular concerns, he said. Because of this, he said short-term investors may flock away from the stock as the company thesis would be more complicated. Mitchelson noted arguments for a merger include creating a larger-scale global publishing company, but he said that could also be achieved by selling Fox News to News Corp. without the merger. “It’s true that both companies have strong balance sheets and both are trading at healthy discounts to asset value, so a merger is less disruptive than it otherwise might be,” Mitchelson said. “Still, an irony not likely to be lost on investors is that these two companies were actually separated to create value just over 9 years ago.” — CNBC’s Michael Bloom contributed to this report.

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