Wall Street hates uncertainty. So it’s safe to assume that much of yesterday’s 2.7% drop in the value of 21st Century Fox’s stock price was due to apprehension about the prospects for its cash cow — Fox News Channel — with the expected departure of its chief Roger Ailes. (The stock is back up 1% so far this morning.)
He’s battling sexual harassment charges, initially from former Fox News host Gretchen Carlson, who filed suit after her contract was not renewed.
But some analysts say not to worry: The channel, and company, would be fine for now if he leaves. Possibly better.
Although losing Ailes “injects some degree of risk into its future,” Bernstein Research’s Todd Juenger says, “we struggle to identify any material negative near-term financial implications.”
Brean Capital’s Alan Gould calls a management change “not positive” — but adds that he doesn’t expect “any near-term changes that would materially impact results.”
There’s no denying FNC’s importance for Fox. The channel (plus Fox Business) generated an estimated $2.5 billion in revenue last year, Pivotal Research Group’s Brian Wieser says citing SNL Kagan data. About $1.5 billion came from cable and satellite companies that distribute FNC to about 90.7 million homes. Another $900 million came from advertisers.
About $1.6 billion flowed to the bottom line (measured by OIBDA, or Operating Income Before Depreciation and Amortization).
The cable and satellite payments are probably secure. Distributors sign multi-year deals to carry channels, typically in a package with several services. They have no immediate opportunity or incentive to drop FNC — picking a fight with Fox, and upsetting the channel’s fans. It would be especially dangerous if there’s a competitor who keeps it.
Advertising is another story. Sales could take a hit if FNC stars including Bill O’Reilly, Sean Hannity, or Greta Van Susteren have clauses in their contracts allowing them to leave if Ailes goes — and they opt to do so. That, presumably, would depress primetime ratings.
But it’s unclear where the stars, or the viewers, would go. Ailes, 76, might be a non-factor if he signs a non-compete agreement.
Even if his departure prompts a walk-out by the on-air talent, it’s hard to envision viewers who like FNC’s take on the potentially exciting presidential election either tuning out or flipping to CNN or MSNBC.
If Fox doesn’t have to worry about taking an immediate financial hit, then an Ailes departure could open an opportunity to fix some of the business problems that plague FNC.
It has TV’s oldest audience, averaging 67 for the entire day and 68 in primetime. “This limits their appeal to most advertisers, and (to put it politely), limits their longevity,” Juenger says.
In addition, with Ailes out, the parent company’s leaders — executive chairmen Rupert and Lachlan Murdoch, and CEO James Murdoch — could make FNC more efficient.
A new leader would almost certainly cost less. Ailes made $21.1 million in 2012, the last year when he was listed in the company’s proxy. He signed a new contract in 2015, agreeing to report jointly to all three Murdochs after publicly insisting that he would only report to Rupert.
That embarrassing corporate clash reinforced investors’ belief Ailes ran FNC as a personal and political fiefdom, not as a strategic business.
“With new leadership in place, reporting lines should become clearer and corporate control better assured,” Wieser says. “This increases opportunities to generate more synergies across the company’s cable networks division. Equally important, future succession plans can be made that would prove to be smoother.”
Juenger also sees an upside. At a time of turmoil in U.S. politics, “[m]aybe it’s a good time for fresh thinking,” at FNC, he says.