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June 27, 2016 Volume XLII, Issue VI NASDAQ: NWS, NWSA

Dow Jones Indus: 17,140.24 Initially Probed: Volume XLI, Issue VI @ $14.03 S&P 500: 2,000.54 Last Probed: Volume XLI, Issue XI & XII @ $13.26 Russell 2000: 1,089.65 Trigger: No Index Component: S&P 500 Type of Situation: Business Value

Price (NWSA Class A): $ 10.62 Shares Outstanding (MM): Cl. A 380.4 Cl. B 199.6 Fully Diluted (MM) (% Increase): 581.7 (0.3%) Average Daily Volume (MM): 3.0(A) / 0.8(B) Market Cap (MM): $ 6,241 Ent. Value (Pro Forma MM): $ 4,542 Percentage Closely Held: : 14% economic, 39% voting 52-Week High/Low (NWSA): $ 15.63/10.40

Trailing Twelve Months Introduction Price/Earnings: NA News Corporation (“,” “NWS,” or the Price/Stated Book Value: 0.4x “Company”) is a global diversified media and information services Company that generated $8.6 Net Cash (Pro Forma MM): $ 1,700 billion in revenues in FY 2015. News Corp has been a Implied Upside to Estimate of tremendous disappointment for shareholders since its Intrinsic Value: 87% separation from Fox three years ago, declining by 28% (or 33% starting from when-issued trading) vs. a 24% Dividend: $ 0.20 rise in the S&P 500 Index. Just since AAF’s initial profile Yield: 1.9% of the Company a year ago, shares have declined by 27%. News Corp’s underperformance reflects a long list Net Revenue Per Share: of concerns including continued declines in its legacy 2015 $ 14.81 and book publishing businesses; growing 2014 $ 14.81 competition in its Australian pay-TV businesses; a 2013 $ 15.38 steady stream of litigation expenses; the deployment of Earnings Per Share: $1.7 billion in capital into M&A with uncertain (and at 2015 $ (0.26) least minimal near term) ROI; and lack of return of 2014 $ 0.41 excess capital. In general, investors appear to have 2013 $ 0.57 “thrown in the towel” and given up on this Murdoch- controlled entity. Fiscal Year Ends: June 30 So what’s to like? For starters, the valuation: Company Address: 1211 Avenue of the Americas News Corp’s $1.7 billion cash hoard and its 62% stake New York, NY 10036 in ’s dominant, publicly listed digital real estate Telephone: Phone: 212-416-3400 company REA Group ($3.5 billion valuation) alone are CEO: Robert J. Thomson worth a whopping 83% of the Company’s current Clients of Boyar Asset Management, Inc. own 6,113 shares of News market cap. This is up from 53% a year ago, and REA Corporation common stock at a cost of $13.05 per share. Group’s prospects appear just as bright with Australian Analysts employed by Boyar’s Intrinsic Value Research LLC own revenue growing at 20%-plus and the just-completed shares of News Corporation common stock. acquisition of iProperty now positioning it as the leader in several large Southeast Asian markets. At the

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Company’s News & Information segment, print advertising is steadily declining as a percentage of revenue and EBITDA growth in key markets (ex-currency fluctuations) recently turned positive. Recent industry transactions including the sale of the ($1.3 billion) suggest alone could be worth more than our $1.7 billion valuation for the entire segment. Australia recently locked up its key sports rights into 2023 and the arguably underpenetrated (~30% of households) is finally working toward marketing a triple play product. News Corp is rumored to be in intense discussions to consolidate Foxtel/Fox Sports Australia and buy out (at least partially) Foxtel’s 50% JV partner , which could be highly accretive and free up Foxtel to pursue new marketing and distribution models.

Valuing REA Group at current market value and principally relying on conservative market-level EV/EBITDA multiples for News Corp’s other businesses, our sum-of-the-parts estimate of News Corp’s intrinsic value is approximately $20/share looking out 2 years (FY18) or 87% above current levels. While we do not expect the “Murdoch discount” to evaporate over the next 2 years, accretive deployment of News Corp’s massive cash position (27% of the current market cap) could help. There are risks here, but consolidation of Foxtel and/or increased return of capital (1.9% current dividend yield but minimal share repurchases to date under a $500 million authorization) appear the most likely uses of cash and offer extremely attractive ROIs. Additionally, the cessation of several negative headwinds ( scandal, other litigation costs, exit from the disastrous digital education foray, extreme Australian dollar depreciation, etc.) may allow investors to belatedly recognize News Corp is no longer just a traditional publishing business with cash burning litigation/education vehicles on the side. Finally, while we do not expect News Corp to ever be split up under the watch of (age 85), the next generation appears less wedded to the businesses and we believe News Corp’s assets could be worth substantially more than $20/share if broken up.

Business Description Note: Please see the June 2015 Asset Analysis Focus report on News Corp for a more detailed business description.

News Corporation is a global diversified media and information services Company reporting in five business segments: News and Information Services (NIS); Cable Network Programming (Fox Sports Australia); Digital Real Estate Services; Book Publishing; and Other. The following table breaks down financial performance by segment in fiscal 2015 (News Corp’s fiscal year ends June 30). News Corporation also holds a 50% stake in Foxtel which is reported under the equity method but may be the Company’s most valuable asset after REA Group. From a geographical perspective, in FY 2015 News Corp generated 45% of revenue from North America, 32% from Australia and /Pacific (principally Australia), and 23% from Europe (including ~18%-19% from the UK). Inclusive of News Corp’s Foxtel stake, Australia would account for approximately 40% of revenue.

Financial Performance by Reporting Segment YTD 3Q FY 2015 ($MM) Revenue Segment EBITDA News & Information Services $ 3,921 $ 334 Cable Network Programming $ 337 $ 101 Digital Real Estate Services $ 593 $ 169 Book Publishing $ 1,213 $ 135 Other $ 2 $ (136) Total $ 6,066 $ 603

News & Information Services The Company’s News and Information Services segment consists of Dow Jones, , News UK, the and (NAM). and Information Services segment generates revenue primarily through print and digital advertising sales and through circulation and subscriptions to its print and digital products. Although News Corp does not break out revenue within the News & Information segment by business, the following provides a rough breakdown based on information contained within Company filings and other publicly available sources and Boyar Research estimates.

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News and Information – Revenue by Business, FY15 (%)

News Corp News Australia America 25% Marketing 17%

Dow Jones News UK 26% 32%

Total News and Information Revenue $5.7 Billion

Source: Company Filings and Boyar Estimates (note: New York Post is not included as it represents an insignificant amount of segment revenue).

• Dow Jones – Operations include the global print and digital product offerings of The Wall Street Journal and Barron’s publications, Marketwatch.com, and the Company’s suite of professional information products (, Dow Jones Risk & Compliance, Dow Jones Newswires, Dow Jones Private Markets, etc). • News Corp Australia – News Corp Australia owns over 120 papers covering a national, regional and suburban footprint. As of March 31, 2015, News Corp Australia’s daily, Sunday, weekly and bi-weekly papers accounted for more than 62% of the total circulation of in Australia with its Sunday newspaper network read by ~4.3 million Australians on average each week. Key properties included (only nationally distributed paper with an unduplicated print and digital audience of ~3.0 million), the biggest selling weekday newspaper (’s ) and the biggest selling newspaper of all (’s Sunday Telegraph with print circulation of ~470,000). News Corp Australia also holds a 15% stake in radio/outdoor ad company APN News and Media as well as a 12.9% stake in online Southeast Asian employment marketplace SEEKAsia. • News UK – The Company publishes leading newspapers in the UK including , The Sun on Sunday, and . As of June 30, 2015, the sales of these four titles accounted for approximately one-third of all national newspaper sales in the UK. Of particular note, The Sun is the most read national paper in the UK (readership: 5.5 million Monday to Saturday; 4.4 million for The Sun on Sunday), while the Times and the Sunday Times boasted readership of 1.1 million and 2.2 million, respectively. • News America Marketing – A leading provider of coupon promotions, advertising programs, special offers and other direct to consumer marketing solutions through a network of more than 1,900 publications, 56,000 retail stores and 300 partner sites, including smartsource.com.

Cable Network Programming (Fox Sports Australia) News Corp’s Cable Network Programming segment encompasses the Fox Sports Australia (FSA) networks. Fox Sports Australia runs 7 subscription TV channels in both standard and high definition: five Fox Sports channels, Fox Sports News, and the channel dedicated to the Australian Football League (AFL). Fox Sports Australia also operates the popular website foxpsorts.com.au. Fox Sports Australia is principally distributed by satellite and cable through long-term carriage arrangements with Foxtel. Fox Sports Australia is also offered by Optus and available over the Internet via Foxtel Play. With 2.5 million subscribers and over 10,000 hours of live sports programming annually, much of which is exclusive, Fox Sports is the dominant provider of sports programming in the Australian cable industry.

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Digital Real Estate Services News Corp’s Digital Real Estate Services division principally consists of its 61.6% equity stake in REA Group Limited. Half of REA Group’s 8 directors are News Corp appointees. REA owns and operates Australia’s leading residential real estate (realestate.com.au) and commercial property (realcommercial.com.au) websites. REA’s sites received 42 million average monthly visitors in 1H FY16 (>2x the competition) with ~95% market coverage.

REA Group principally derives revenues from real estate agents/brokers by offering fee-based upgrades to individual property listings and other digital advertising solutions (collectively referred to as “depth revenue”) as well as online advertising subscription packages. The Australian residential business contributed 61% of segment revenue in 1H FY16, while Australian commercial business accounted for 7%. REA also operates a media and developer business that services the property developer and display media markets (24% of revenue). REA generates over 90% of revenue in Australia but also operates the leading property site in Italy (casa.it) and property websites and apps in France, Luxembourg, Germany and .

REA Group Revenue Sources – 1H 2016 (A$MM) Australia - Residential 190.5 Media, Developer & Other 75.8 Australia - Commercial 23.1 Europe 25.1 Asia 0.3 REA Group 314.8

News Corp expanded its digital real estate portfolio into the U.S. with the acquisition of , Inc. for $952 million ($21/share) in November 2014 (REA Group acquired a 20% minority interest in Move). Move’s principal property is realtor.com, the #3 real estate listings website in the U.S. with over 28 million users. Realtor.com has an exclusive, perpetual partnership with National Association of Realtors (NAR) that provides it with comprehensive, up-to-date data from over 800 multiple listing services (MLS) across the country covering virtually the entire market. Move also owns move.com and ListHub, a digital database that sells aggregated MLS data to over 130 publishers.

Book Publishing News Corp’s HarperCollins is the #2 consumer book publisher in the world based on global revenue with operations in 18 countries. HarperCollins includes over 120 branded publishing imprints and is a leading publisher of electronic books (e-books). In August 2014, HarperCollins acquired leading women’s fiction publisher Harlequin for $414 million. Harlequin is well established in Europe and Asia Pacific.

Foxtel News Corp and Telstra (largest telecom operator in Australia) each own a 50% equity stake in Foxtel. News Corp records Foxtel as an equity investment for financial reporting purposes, with a $1.4 billion equity valuation as of 3Q FY16. Foxtel is the dominant pay-TV provider in Australia, with 2.9 million subscribers or a ~95% market share. Foxtel offers a wide range of programming across hundreds of channels. Revenue is principally generated from subscriptions but also includes advertising on some channels, and ARPU (average revenue per user) exceeds A$95/month.

Murdoch Maintains Control But Not Invincible News Corp maintains two classes of common stock including voting Class A shares and non-voting Class B shares. The following summarizes share amount totals of the two classes of common stock as of April 29, 2016: News Corp's Share Class Summary - April 2016 Common Class Voting Rights Ticker Amount (MM) Class A No NWSA 380.4 Class B Yes NWS 199.6 Total: 580.0 - 42 - News Corporation

Media mogul Rupert Murdoch (age 85) serves as News Corp’s Executive Chairman and beneficially owns 78.7 million shares of News Corp’s Class B common stock and 2.2 million shares of Class A common stock. By virtue of his ownership of class B shares, Mr. Murdoch maintains a 39% voting interest in the Company. In March 2014, Mr. Murdoch promoted his oldest son Lachlan (age 44) to non-executive co-Chairman of News Crop. Lachlan initially joined News Corp in the mid-1990s and ultimately became deputy chief operating officer. In 2005, Lachlan left News Corp and moved to Sydney and formed an investment firm (Illyria Pty.). Prior to becoming non-executive co-Chairman Lachlan was serving as Chairman of , an Australian broadcaster that he had made an investment in during 2010. Rupert’s younger son James (age 43) recently became CEO of Fox and does not hold an executive position at News Corp, but serves on the Company’s board.

Unsurprisingly, the remainder of News Corp’s board includes many longtime Murdoch/News Corp associates and we would view them as little more than a rubber stamp for the Murdochs. This includes , who was first selected by Rupert Murdoch to the board at age 27 in 2007 after the Bancroft family/Dow Jones failed to exercise within the allotted time their right to nominate a member under the terms of the 2007 sale agreement. (The sale agreement included the right to nominate one board member for 10 years.) Based on Ms. Bancroft and the Bancroft family email correspondence released by The Wall Street Journal (apparently some in the news room were unhappy with the sale as well as the failure to choose a Dow Jones insider to fill the seat), Ms. Bancroft’s opera skills, highly flexible schedule and her fluency in French (but evidently not her English spelling ability) were her primary qualifications.1

While the Murdochs do not quite control a majority of News Corp’s vote, News Corp has a poison pill which limits an outsider from acquiring more than 15% of the Company’s voting shares. This has insulated News Corp from any activist campaigns to date, but we would not dismiss the possibility that an outside activist could still become involved at some point. For example, activist shareholder ValueAct obtained a board seat at former parent Fox in 2015 as part of a standstill agreement after amassing a 6% voting stake. (Fox has the same voting structure and Murdoch ownership level as News Corp.) At News Corp, Australian manager (10% voting stake) and International Value Advisors (7% voting stake) have amassed significant voting stakes but are not known for a having an activist bent.

While Rupert Murdoch’s six-decade capital allocation history includes its share of blemishes—among them the Dow Jones acquisition for $5.7 billion in 2007—on the whole Mr. Murdoch has generally been viewed as a visionary. His foresight to diversify his empire away from publishing proved astute and created a tremendous amount of shareholder value over the years. In our view, the jury is still out on the younger Murdochs and this is a key consideration worth monitoring as the elder Murdoch begins taking a less active role in his media empire. But we would also note the second generation appears somewhat less involved at News Corp than Fox. While Rupert is still a sprightly 85, his eventual departure from an executive role could lead to a wholesale re-evaluation (and revaluation) of the News Corp conglomerate. In particular, this could be a catalyst for News Corp to explore alternatives for Rupert’s beloved newspaper/publishing assets which produce minimal tangible economic value for NWS shareholders and could fetch far more in a sale.

Foxtel & Fox Sports Australia Update: Changing Landscape, But a Net Positive? As AAF has detailed in many reports over the years, the evolving television/video landscape is beginning to impact media companies and has raised many more questions and concerns among investors over the long-term outlook. While there are some similarities with the U.S. environment, in many ways Foxtel’s competitive situation in Australia is unique and—in our view—more favorable. Since acquiring in 2012, Foxtel has held a near-monopoly on pay-TV in Australia. With a combination of Company-owned content (including Fox Sports Australia) and licensed third party content/cable networks, Foxtel sells a full cable bundle with an attractive ARPU in excess of $95/month and low annual churn of ~10%. In addition to a virtual pay-TV monopoly, Australia offers Foxtel more favorable secular trends than U.S. programmers/MVPDs: pay-TV penetration is just ~30% of households in Australia and growing, versus ~90% pay-TV penetration and declining (albeit modestly with more cord “shaving”) in the U.S.

1 “Bancroft Family Email Exchanges,” The Wall Street Journal, Nov. 7, 2007 http://www.wsj.com/articles/SB119438299758184301 - 43 - News Corporation

This is not to say Foxtel and Fox Sports Australia have not faced challenges. Broadcast competition has always been robust, aided by federal “anti-siphoning” laws that force some premium content such as major sporting events onto broadcast TV. And while slower to develop in Australia, in recent years, a new threat has emerged in the form of Internet delivered TV (IPTV) and “over the top” (OTT) subscription video-on-demand (SVOD) streaming services. SVOD competition includes Quickflix, Stan (a partnership between broadcaster and ) and most prominently, . Netflix launched in Australia in March 2015 at a modest A$9/month with one free trial month. Upstart IPTV service Fetch is a somewhat more direct competitor to Foxtel. FetchTV offers a basic “entertainment pack” featuring over 35 programming channels and enables app streaming of Netflix and other SVOD services through its device. Fetch TV is currently distributed through Telstra’s telecom/ISP competitors including Optus, iiNet, and Dodo. But the biggest competitive challenge over the years may actually have come from piracy. By some measures, Australians are the most profligate consumers of pirated television/film content in the world. Nielsen Online Ratings estimated 2.8 million people or 16% of Australian Internet users visited the top 2 piracy/torrent sites in the month of May 2014 alone— approximately 500,000 of whom pirated (which airs exclusively on Foxtel’s showcase channel), according to Foxtel.2 One recent survey (albeit from a media IP advocacy organization) found that 29% of Australians consume pirated media.

In our view, the potential threat posed to Foxtel and Fox Sports Australia by Netflix—and Internet- delivered content in general—has been exaggerated. Netflix does not disclose international subscribers by country but analysts have estimated Netflix Australia achieved a fairly impressive ~1 million subscribers by the end of 2015. However, as illustrated in the following chart, extensive surveys by Roy Morgan Research suggest subscribership slowed significantly by 4Q CY15 as many households likely cycled off the free trial periods. Customers may have been underwhelmed by Netflix Australia’s content. Netflix only offered as little as ~1/14th the content of the U.S. version at launch, and even less premium content compared to Foxtel’s extensive offerings. Furthermore, the official entrance of SVOD competition in 2015 was not actually an entirely new revelation; we would note that a material number of Australians were already accessing Netflix’s U.S. service (est. ~300,000) via VPN/proxy services prior to the official launch. Many Australians sampling Netflix’s Australian version may already have been accustomed to the superior U.S. version, and Netflix only began to make serious efforts to block customers from circumventing geographical restrictions in early 2016. The other major SVOD competitor Stan appears to have made less progress in Australia. Stan CEO Mike Sneesby touted reaching 700,000 subscriber sign-ups in early 2016, but this is a cumulative gross sub number fueled by free trials, and net paying subs are not believed to be above ~300,000. Quickflix also failed to gain traction with its SVOD product and, without the balance sheet to support ongoing losses, entered administration earlier this year. Fetch TV presents a somewhat more formidable threat, although we would view it as far from a substitute to Foxtel. Fetch TV reached 400K subscribers by early 2016 and was on place to hit 600K by year-end 2016 according to CEO Scott Lorson. 3,4

2 “Foxtel vs piracy,” The New Daily, June 22, 2014 http://thenewdaily.com.au/entertainment/2014/06/22/foxtel-vs-pirates-pirates-winning/ 3 “Fetch TV seeks to hit 1m subscribers,” Mumbrella, June 16, 2016 https://mumbrella.com.au/fetch-tv-to-challenge-telstra-launches-mini-374319 4 “Netflix and other video-streaming services could overtake Foxtel by 2018,” The Sydney Morning Herald, August 7, 2015 http://www.smh.com.au/business/media-and-marketing/netflix-and-other-videostreaming-services-could-overtake-foxtel-by- 2018-20150807-gitnzi.html - 44 - News Corporation

Netflix Australia Subscribers (Est.)

Source: Roy Morgan Research via Forbes

Recent Results: Strong Topline Growth, Earnings Pressured Foxtel has taken extensive steps to address the competition head-on. Foxtel launched its own SVOD service called in partnership with broadcaster in March 2014, expanding the programming offering from movies to television series in 2015. As discussed in AAF’s initial profile in June 2015, Foxtel also took drastic pricing action in November 2014, introducing a new expanded basic cable package at $25/month or half the price of its previous cheapest offering. As expected, this has depressed revenue but improved subscriber growth and reduced churn. Foxtel added over 220K subscribers (8.7% growth) in FY15 but revenue was relatively flat in local currency and EBITDA declined 8% principally due to the pricing action. Foxtel added another 37K subs in 1H16 and churn declined further to just over 10%, but ARPU declined mid-single digits and EBITDA was down 7.7% (AUD) due to higher programming costs and sales and marketing costs backing triple play and Presto. In 3Q FY16, revenue increased approximately 2% and EBITDA declined 4% Y/Y in AUD reflecting higher gross subscriber adds and Presto investments. Churn spiked to 14.3% due to the introduction of no-contract offers earlier in FY16.

While the ongoing EBITDA declines are disappointing, we believe Foxtel is making the right decision to grow subscribers and increase their lifetime value by offering a more competitively priced product. Results have been more encouraging at Fox Sports Australia in 2016. FSA revenue increased 7% in local currency YTD 3Q16, reflecting subscriber growth that tracks Foxtel’s performance as well as advertising growth. Segment EBITDA was flat in constant currency reflecting higher programming rights and production costs associated with the Rugby World Cup. However, Australian dollar weakness has continued to be a headwind with FSA revenue down 15% and EBITDA declining 11% in USD YTD 3Q16.

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Foxtel Historical Financial Performance (A$MM) Financials: FY12 FY13 FY14 FY15 1H15 1H16 Revenue 2,955 3,094 3,107 3,138 1,574 1,660 EBITDA 771 924 981 900 470 434 margin 26.1% 29.9% 31.6% 28.4% 29.9% 26.1% EBIT 363 497 587 513 278 277 margin 12.3% 16.1% 18.9% 16.2% 17.7% 16.7% Subscribers: Subs (ending, M) 2,399 2,481 2,620 2,847 2,667 2,884 Churn 16.2% 14.2% 12.5% 10.9% 11.4% 10.2% ARPU (monthly) NA $105.67 $101.52 $96.49 $99.24 $96.55

Fox Sports Australia and Foxtel Retain Top Sports Rights In addition to the sheer breadth of general entertainment video content offered by Foxtel, another key advantage is Fox Sports Australia’s premium sports content. FSA is akin to the ESPN of Australia, but arguably with an even greater lead over the competition; FSA controls the vast majority of major sports programming outside of broadcast television. As AAF has often detailed, the DVR-proof, must-see nature of live sports makes them highly valuable for advertisers and programmers alike. Since our last report on News Corp, Fox Sports Australia solidified its long-term stranglehold over the country’s most popular sports programming—albeit at an increased cost. In August 2015, the popular Australian Football League (AFL) completed the auction of broadcast rights covering 6 years from 2017-2022 for a record A$2.5 billion, representing a 67% increase in the average annual rate from the 2012-2016 contracts. As part of the deal, Fox Sports will pay ~A$1.2 billion to maintain broadcast rights to every match including exclusivity on a majority of matches. Fox Sports will also gain cross-platform rights so the games can be streamed on Foxtel Play (IP-delivered) and Foxtel Go (mobile).

Fox Sports Australia’s bid to extend its rights to the National (NRL) telecasts beyond 2017 required more extensive negotiations. In August 2015, broadcaster Nine Network initially acquired rights under a 5-year, A$925 million deal that took away some of FSA’s rights to premier weekend games. In November 2015, FSA eventually reached a 5-year, A$920 million agreement that will allow FSA to retain comprehensive simulcast rights and significant exclusive rights including 5 exclusive matches per weekend, from 2018-2022. The deal represented a 70% increase from the previous contract for the NRL. Fox Sports will also launch a dedicated NRL channel in 2017 to support the league, as it already has in place with the AFL.

Fox Sports, Foxtel, Telstra Partnerships in Flux: Positive Catalyst? Telstra’s 50% equity interest has long complicated Foxtel’s managerial/operational strategy. On the one hand, the Telstra partnership provides a valuable commitment from the dominant broadband Internet and mobile telecom operator in Australia. On the other hand, it has complicated negotiations between FSA and Foxtel as well as between Foxtel and Telstra regarding distribution and network fees, marketing strategies, etc. Only in February 2015 did Foxtel belatedly reintroduce a Foxtel-branded triple play service, powered by Telstra’s network and bundled in one bill. This was likely delayed due to extended negotiation over terms of the arrangement, and the initially overpriced offering required further renegotiation/repricing later last year to create a product that was actually marketable. The current broadband offering still remains expensive and additional revisions may be needed to create a truly competitive offering. Arguably, the Telstra relationship has also handcuffed Foxtel/FSA from fully exploring alternative distribution partnerships.

More recently, conflict—or at least the appearance of it—has increased alongside Telstra’s growing desire for wholly owned/controlled distribution and content. Telstra began marketing an independent IPTV product called Telstra TV (akin to Apple TV) to their Internet customers in 2015. Telstra TV includes Internet- delivered SVOD access (Stan, Presto, Netflix) and streaming content from broadcasters—but not Foxtel content outside of Presto. Telstra TV was only up to a modest 75K subs at 2Q FY16 (year-end 2015), and Telstra has not seen cannibalization of Foxtel subs—at least according to management.

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Both Telstra and Foxtel have made major leaderships changes since 2015, which may at least partially reflect frustration over the current situation with Foxtel and could catalyze renewed efforts to re-evaluate the terms of the relationship. Telstra announced a CEO change in early 2015 with Andy Penn taking over that May, and then John Patrick Mullen (known as a “Mr. Fix-It”) took over as Telstra chairman in February 2016. At Foxtel, former News Corp Australia CEO (and before that, Foxtel COO and CFO for 9 years) Peter Tonagh recently took over for Richard Freudenstein as CEO in April 2016.

Not coincidentally, in recent months, there has been intense media speculation over the future of Telstra’s relationship with Foxtel. It has been widely reported this year that Telstra is evaluating an IPO and/or at least a partial sale of its stake in Foxtel. News Corp is also believed to have right of first refusal on any sale/IPO of Telstra’s stake, and News Corp appears to be interested in increasing its ownership in Foxtel. This could potentially involve News Corp contributing its Fox Sports Australia division to Foxtel in exchange for a larger stake in the combined entity. While Andy Penn and other Telstra executives continue to voice their continued support for Foxtel as a strategic asset, we would not give too much weight to these comments and in any case, exploring a partial sale would still leave Foxtel as a “strategic asset.”

In our view, any of the above-mentioned alternatives could be positive for News Corp. An IPO would provide investors with clarity on the very substantial value of News Corp’s Foxtel stake (we estimate it is News Corp’s second most valuable asset), which is currently not consolidated on NWS’ financial statements but reported as an equity investment. Alternatively, any transaction that increases NWS’ stake in Foxtel could be highly accretive. The rumored transaction price of only ~8.5x-9x EBITDA is compelling, especially in an all-cash deal considering News Corp’s excessively capitalized balance sheet and depressed share price. From a strategic standpoint, a combination of Foxtel and Fox Sports Australia and/or the reduction/elimination of Telstra’s stake could also be beneficial by reducing the current frictions and managerial layers. This could increase Foxtel/Fox Sports’ negotiating power with Telstra and even open the door to explore additional distribution relationships or standalone triple-play bundles over the nascent national broadband network. This could present meaningful subscriber upside for Foxtel.

Digital Real Estate Services Update News Corp’s 62% stake in REA Group is its most valuable asset, and has remained a bright spot for the Company. REA shares (ASX:REA) have rallied 49% (from A$39.19 to A$58.37) over the past 12 months, boosting the value of NWS’ stake from $2.4 billion to $3.5 billion (slightly negatively impacted by further depreciation in the Australian dollar). REA’s stock performance reflects the company’s continuing record of impressively high growth, with almost no signs of a slowdown despite its increasing scale. Revenue increased 20% in FY 2015 and again YTD 3Q16, driven by hugely successful penetration gains in new premium service offerings. This follows REA’s 22% revenue CAGR from FY08-FY14. Expenses continue to grow more slowly than revenue, with EBITDA margins expanding another 320 bps in FY15 and expected to further increase in FY16.

REA Group Historical Performance (FY ended June; A$MM) YTD YTD 2008 2009 2010 2011 2012 2013 2014 2015 3Q15 3Q16 Revenue 133.6 167.8 194.3 238.4 277.6 336.5 437.5 522.9 384 461 EBITDA 46.1 62.5 78.0 103.2 126.0 163.9 225.1 285.8 210 263 Margin 34.5% 37.2% 40.1% 43.3% 45.4% 48.7% 51.5% 54.7% 55% 57%

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Assessing Australian Real Estate Market Risks In assessing REA Group, we believe it is important to discuss the current real estate environment in Australia. Within the past 12 months, there has been growing concern over an overheated real estate market. Home prices rose 8.7% across Australia (per the 8 capital city weighted average index) in 2015, the third consecutive year of high single to low double-digit growth. In particular, prices in Sydney and to a lesser extent Melbourne were growing at unsustainable rates. Residential prices in Sydney rose 14.8% in 2013 and 12.1% in 2014 with Y/Y growth peaking at a bubbly 19.9% in 3Q15. Price increases have been driven by a combination of declining interest rates (now at record lows), tax incentives (“negative gearing”), and heavy Chinese/foreign investment demand which was further intensified by the depreciation of the Australian dollar.

Australian Residential Property Prices, 1Q06-1Q16 (% Change)

Source: Australian Bureau of Statistics

Recent data indicates Australian residential prices are beginning to roll over—at least temporarily. According to data recently released by the Australian Bureau of Statistics, in 1Q16 home prices still increased 6.8% Y/Y nationwide (8 capital city composite) and ~10% Y/Y in Sydney and Melbourne, but the deceleration in sequential growth that began in 3Q15 worsened. Sydney prices declined sequentially by 1.6% in 4Q15 and 0.7% in 1Q16 while Melbourne sequential growth decelerated from 4.2% in 2Q15 to 0.8% by 1Q16. Overall, Australian home prices actually declined by 0.2% Q/Q in 1Q16 versus +0.2% in 4Q15 and consensus 1Q16 expectations of +0.8%, marking the first quarterly decline since 3Q12.

The consensus still expects the residential property market to achieve ~5% growth in 2016, but the balance of risks appears to be tilted to the downside. The Australian economy has shown resilience of late, but the collapse in commodity prices has clouded the outlook. Heavy foreign (Chinese) purchasing has been another major driver of the rapid price increases in the capital cities in recent years, with Chinese investment in Australian property doubling in each of the past two fiscal years to in excess of A$24 billion in FY15 (illustrated in the following chart). While Chinese demand has yet to noticeably break, the recent trends are not sustainable and Chinese purchases appear further threatened by the combination of a slowdown in China, potential renminbi devaluation or capital controls, a crackdown on illegal/undocumented foreign purchases in Australia, and the recent implementation of punitive taxes on foreign purchasers in some states. Banks are also beginning to tighten lending standards in the face of somewhat alarming consumer leverage levels. There is also some policy uncertainty as Australian laws supporting “negative gearing”—highly leveraged buy-to-rent property schemes that generate positive tax benefits—are coming under more intense scrutiny from the Labor Party.

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Foreign Investment in Australian Property (A$ Billion)

China

U.S.

Japan

Source: Foreign Investment Review Board, via Bloomberg

While the Australian real estate market does present some concerns, REA Group’s business model appears resilient to all but a complete collapse of the market (which appears unlikely). It should be emphasized that the Australian residential market only accounts for 61% of REA’s revenue to begin with. The business is not overly reliant on advertising (display advertising is only 5% of Australian revenue) or directly tied to real estate prices, and a moderate cooling down in transaction volume can actually have some positive effects—longer average time on the market for property listings translates to more inventory and listing fees. Notably, nor have we seen any material impact from the recent cooling down of the real estate market on REA’s Australian segment results to date. REA Group reported Australian residential depth revenue growth of 3Q16 following Australian segment revenue growth of 22% and EBITDA growth of 31% in 1H FY16 (YTD 3Q16 segment-level EBITDA not disclosed), despite flat listings volume across the industry. The Australian real estate market has had flat transaction volumes for over a year and has experienced significant price downturns—albeit short- lived—in late 2008-early 2009 and in 2011-2012, with no material impact on REA Group. The migration of advertising dollars online is still progressing in Australia, with ~50% of ad budgets still directed to traditional media that reportedly generates lower (and certainly less measurable) ROI. REA Group is also increasingly selling agents on a full platform model.

Long-Term Opportunities: Move, Inc. and REA Outside Australia Australia accounted for 90% of REA Group revenue in FY15, but the company has attractive long-term opportunities outside of its home countries. In Europe, REA has had a more challenging time achieving critical mass but continues to progress. Revenue increased 10% to €31.8 million in FY15 while EBITDA nearly doubled to €6.7 million. Local currency revenue growth slowed to 7% in 1H16 but REA continues to build its audience nicely with average monthly visitors up 10% and listing volume up 20% across its European platform.

REA Group recently solidified its foothold in with the November 2015 announcement that it would acquire the remainder of Southeast Asian digital real estate company iProperty Group (completed in February 2016; REA already held a 23% stake) for approximately A$500 million. At first glance, it is difficult to be excited by the terms of the deal; REA paid an elevated double-digit multiple of revenue (A$32 million in 2015) for iProperty, which just turned EBITDA-positive in 2015 (A$2.5 million). But iProperty revenue is growing at ~50% per annum and the company has a head start (#1 with 50%-85% digital market share across its portfolio) in markets that offer extremely attractive long-term prospects. iProperty’s markets (, , Singapore, , Hong Kong, and Macau) are ~2x the size of Australia based on the number of property sales and cover ~10x the population. The current real estate advertising budgets are comparable between iProperty’s markets and Australia (~A$1 billion per year), but online penetration is only ~5% of the total budget while growing at an estimated ~40%-50% per annum.

We believe News Corp’s U.S. digital real estate business Move (20% owned by REA Group) is still many years away from achieving intrinsic value on par with the $952 million price tag NWS paid in November

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2014 (although it should be noted NWS did also acquire $940 million in pretax NOLs). But Move has continued to show signs of progress. According to internal data, traffic to Move’s web/mobile site realtor.com was up 30% Y/Y to 50 million average monthly unique users in 3Q16 and was up another 25% Y/Y to 55 million in April 2016. Minutes spent on the site were also up ~30%. News Corp does not consistently or fully disclose Move financials, but revenue was up by 35% to $87 million in 2Q16 and by 20% in 3Q16. Move also turned consistently EBITDA- positive (even after stock comp. expense) in FY16, including in 3Q16 despite an $11 million increase in incremental legal expenses related to the recently-settled lawsuit against Zillow. NWS CEO Robert Thomson provided some optimistic commentary on the business on News Corp’s 3Q16 earning call on May 5:

“ ... we fully expect core EBITDA growth [at Move] this quarter, and we fully expect even faster EBITDA growth in succeeding quarters. We're in the middle of what you might call home renovations at realtor.com. You can see from what you might call a buy-side product, the Co- Broke, where we have 45% revenue growth year on year, that side of the business is doing well. And Ryan O'Hara and the team at Move are now working on improving the sell side products so – one known as Turbo and another known as Showcase, and we expect over coming months and into the next fiscal for those also to have a positive impact.”

News and Information: Challenges Persist but Underappreciated Intrinsic Value Unsurprisingly, News Corp’s News & Information Services (NIS) business continues to be hamstrung by the negative trend lines underlying newspaper industry print advertising spending across News Corp’s geographical footprint. Further large negative currency moves against USD have also continued to plague NIS results. NIS segment revenue declined 9% YTD 3Q16 but was down a more modest 4% in constant currency, with Adj. EBITDA (constant currency) down a dreary 17% YTD 3Q16, although the Adj. EBTIDA decline moderated to 11% in 3Q16. NIS results have continued to disappoint investors, but the underlying trends actually appear to be on a better path than the conservative, below-market outlook we built into our forecasts a year ago. AAF had forecasted ongoing double-digit annual advertising revenue declines for the foreseeable future with more modest declines in circulation, subscription, and other revenue.

Advertising remains the primary revenue source for NIS, contributing $2.1 billion or 53% of News & Information Services revenue YTD 3Q16. Advertising is clearly still in secular decline with NIS ad revenue down 13% YTD, largely in line with our forecasts. But it should be noted that ad revenue results have been slightly better than our forecasts adjusted for the currency headwinds. Furthermore, in addition to currency, a $75 million decline YTD in freestanding insert product revenue at News America Marketing (NAM) contributed a large portion of NIS’ ad revenue decline. We do not expect stabilization in NIS ad revenue in the next few years as print still contributes the lion’s share of ad revenue, but currency and NAM stabilization could fuel meaningful improvement from current trends.

News and Information - Selected Financial Data ($MM) 9 Months 9 Months 2011 2012 2013 2014 2015 FY 2015 FY 2016 Revenues: Advertising $4,694 $4,388 $3,938 $3,529 $3,163 $2,391 $2,074 Circulation and Subscription $2,522 $2,326 $2,370 $2,245 $2,159 $1,626 $1,546 Other $360 $344 $423 $379 $409 $310 $301 Total Revenues $7,576 $7,058 $6,731 $6,153 $5,731 $4,327 $3,921 % Change 4.6% -6.8% -4.6% -8.6% -6.9% -5.8% -9.4%

Operating expenses ($4,294) ($4,195) ($4,099) ($3,706) ($3,442) ($2,624) ($2,333) SG&A ($2,129) ($1,924) ($1,837) ($1,782) ($1,686) ($1,269) ($1,254) Total Expenses ($6,423) ($6,119) ($5,936) ($5,488) ($5,128) ($3,893) ($3,587) % of Total Revenues 84.8% 86.7% 88.2% 89.2% 89.5% 90.0% 91.5%

EBITDA $1,278 $939 $795 $665 $603 $434 $334 Margin (%) 16.9% 13.3% 11.8% 10.8% 10.5% 10.0% 8.5% Note: Segment EBITDA excludes losses related to News America Marketing litigation of $125 million in 2011 and $280 million in 2016.

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Circulation and subscription revenue (39% of segment revenue) are also showing earlier signs of stabilization than we anticipated. Circulation and subscription revenue actually increased YTD 3Q16 ex-currency fluctuations driven by positive results at Dow Jones and News Corp Australia. Both business units have been relative bright spots, with News Corp Australia revenue down 5% YTD 3Q16 excluding a 15% foreign currency hit and Dow Jones revenue nearly flat. Both units posted positive adj. EBITDA growth in 3Q16 as price increases and digital subscriber growth at Dow Jones and News Corp Australia have begun to more than offset circulation volume declines. Digital subscribers to The Wall Street Journal now total 893,000 or 45% of the subscriber base, and digital accounted for a majority of revenue at Dow Jones in the most recent quarter.

Looking forward, the improvement in circulation and subscription revenue appears sustainable, which should moderate the impact of declines in advertising revenue at NIS as they become the principal revenue source within the next few years. Currency comparisons will also become more favorable beginning in 4Q16 based on current exchange rates (excluding GBP post-Brexit). We also believe NIS still has plenty of fat that could be trimmed; SG&A expenses totaled nearly $1.3 billion or 32% of revenue YTD 3Q16, up ~270 bps Y/Y as a percentage of revenue. Assuming NIS segment EBITDA margins erode further from 10.5% in FY16 to 7% in FY18, and applying a highly discounted 5x EV/EBITDA multiple, we estimate News Corp’s NIS business is still worth close to $1.7 billion.

Industry Transactions Support Far Higher Private Market Value Recent activity in the industry helps to highlight the potential private market value of some of News Corp’s iconic publishing assets, which could be far in excess of $1.7 billion. Most prominently, The Wall Street Journal’s closest rival the Financial Times was acquired from Pearson by Nikkei in 2015 for approximately £844 million (~$1.3 billion at the time of the announcement). The deal valued the FT at hefty multiples of approximately 2.5x sales or 35x AOI (2014 figures). Shortly thereafter, Pearson reached an agreement to sell its 50% stake in The Economist at an enterprise valuation of £955 million or an only slightly less remarkable valuation level of 23x AOI. While we do not expect Rupert Murdoch to part with the core of his prized newspaper business, it is likely that The Wall St. Journal alone could fetch substantially more than the FT or The Economist given its even more iconic brand and superior reach. The FT had 566K digital subscribers and just over 200K print subscribers at the close of 2015 compared to The Wall St. Journal’s nearly 900K digital subscribers alone and ~1.9 million total subscribers. News Corp CEO Robert Thomson provided similar commentary on the Company’s 4Q15 conference call last August: “I think we've always had great faith in the value of The Wall Street Journal. I'll let you do the math there. If the Financial Times is worth what the Nikkei Group paid and The Wall Street Journal is a far larger, far more successful, far more profitable market, what's The Wall Street Journal worth?”

Recent Newspaper Industry Transactions (MM) Target Acquirer Announced Ent. Value EV/Sales EV/AOI Financial Times Nikkei July 2015 £844 2.5x 35.2x Economist (50%) Exor/Ownership Aug. 2015 £955 NA 22.7x Tribune Publishing (Tronc) Gannett April 2016 $864 0.5x 5.1x* *EV/Adj. EBITDA Source: AAF estimates

The ongoing takeover saga at Tribune Publishing could also help illustrate the value of News Corp’s newspapers. In April 2016, Gannett made a $12.25/share, all-cash bid for Tribune Publishing (later renamed Tronc) which operates 11 newspapers including the L.A. Times and the Chicago Tribune. Subsequently raised to $15/share (all cash) or a 99% premium to Tribune Publishing’s unaffected share price, the latest ~$864 million (enterprise value) offer represented a multiple of approximately 5x Adj. EBITDA but has been spurned by Tronc’s board to date. On the whole, News Corp’s newspaper portfolio includes far more iconic, national papers than Tribune Publishing’s mostly regional portfolio and which would likely command a significant premium to Tribune’s papers.

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Multiple News Corp Headwinds Removed Just since our report last year, News Corp has taken major steps to resolve several different issues that had been a drag on the Company’s financial results for an extended period. These steps include: • Digital Education Exit: Perhaps the most substantial positive announcement was News Corp’s decision in August 2015 to exit from its disastrous foray into the digital education business. Built around the $380 million acquisition of the digital education software and tablet company Wireless Generation (renamed Amplify) for $380 million in FY 2011, the business was long a cash pit that that produced no tangible benefits for shareholders; all told, News Corp invested over $1 billion in the business including the acquisition price. News Corp shares rose nearly 8% on the exit announcement, despite receiving no proceeds for the sale of Amplify to its management team and the shutdown of the remainder of the digital education business in 1Q16. • News America Marketing Lawsuit: Chief among News Corp’s several long-running legal battles were multiple lawsuits related to claims of antitrust violations by the Company’s NAM business which dated from 2008 to as far back as 1997. News Corp initially recorded charges of $500 million in 2010 and another $125 million in 2011 related to settlement of some of the lawsuits, but only resolved the principal lawsuit from a class representing several hundred former consumer packaged goods customers in February 2016. News Corp will pay $280 million under the terms of the settlement, pending court approval. Former NAM competitor Valassis Communications still has one outstanding suit alleging violations of their prior $500 million settlement, but the resolution of the other suits should substantially reduce News Corp’s exposure as well as litigation costs going forward. • UK Newspaper Matters: The and related scandals that engulfed News Corp’s News of the World publication beginning in 2011 produced long-running costs in addition to the reputational damage. While News Corp was partially indemnified by Fox against additional costs post-spinoff, News Corp still recorded several hundred million dollars of ongoing expenses in recent years. At this point, the Company has settled or won dismissal on most claims, and legal costs (net of indemnification from Fox) declined to $15 million YTD 3Q16 from $50 million in FY15 and a staggering $470 million from FY10-FY14. • Zillow Lawsuit: A rare lawsuit in which a News Corp subsidiary was actually a plaintiff, Move Inc. recently settled its lawsuit against Zillow related to the latter’s hiring of former Move executives and acquisition of Trulia. As the case was headed to trial in May 2016, Move reached a settlement with Zillow that will see Zillow pay $130 million. The National Association of Realtors is entitled to 10% of the settlement proceeds net of litigation-related costs and fees. While some analysts expected a larger settlement, this will offset a meaningful portion of the NAM settlement costs.

Balance Sheet, Cash Flows, and Capital Allocation News Corp has maintained a strong balance sheet since its 2013 separation, with $2.4 billion in cash and no debt at the time of the spinoff. The robust cash position was established to allow the Company to pursue opportunities outside of its traditional newspaper business. The Company has deployed ~$1.7 billion into M&A and invested heavily (~$400 million to $500 million) in its shuttered digital education business since then, but News Corp still maintains a strong financial position. As of March 31, 2016, NWS held $1.9 billion in cash on the balance sheet versus just $20 million in debt (excluding ~$300 million in net debt at majority-owned REA Group) and a $281 million pension liability. This reflects News Corp’s fairly robust FCF generation; FCF available to shareholders was $368 million ($0.62/share) in FY15, roughly in line with FY14 despite a $30 million currency headwind. FCF available to shareholders totaled $362 million YTD 3Q16 and looking to 4Q FY16 and beyond, FCF will benefit from the cessation of each of the headwinds described in the previous section (albeit with some net litigation settlement expenditures expected shortly). Capex is also declining substantially from ~$380 million in FY14-FY15 which included expenses to rationalize NWS’ footprint in the UK and at HarperCollins.

News Corp management has not offered much commentary on capital allocation policy, but has suggested they view ongoing FCF generation as a source of capital that could be returned to shareholders, while its existing cash hoard is principally earmarked for internal investments and potential acquisitions. Following, we review the possible avenues of capital deployment going forward.

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Free Cash Flow Available to News Corporation ($MM) YTD FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 3Q 2016 Net Cash Provided by Operating Activities $1,331 $851 $501 $854 $831 $589 Less: Capital Expenditures ($549) ($375) ($332) ($379) ($378) ($180) $782 $476 $169 $475 $453 $409 Less: REA Group FCF ($55) ($79) ($127) ($145) ($130) ($92) Plus: Cash Dividends received from REA Group – $11 $30 $35 $45 $45 Free Cash Flow Available to News Corp. $727 $408 $72 $365 $363 $362

• Share Repurchases & Dividends: News Corp’s share repurchase (in)activity has been very frustrating to date. NWS established a $500 million authorization after the spinoff but did not initiate any repurchases until May 2015. The Company has only repurchased 5.2 million NWSA shares to date at a total cost of $71 million ($13.70/share) and has not repurchased any shares since February 2016 (NWS is required to file daily repurchase activity under Australian securities rules). Obviously, given our estimate of NWS shares’ discount to intrinsic value and NWS’ overcapitalized balance sheet, we find NWS’ inability to even redirect its ongoing FCF into share repurchase activity somewhat puzzling. News Corp also initiated a $0.10/share semi-annual dividend (1.9% yield) last June and could consider raising it at some point in the near future. • Foxtel Consolidation: It is interesting to observe that News Corp has not repurchased shares since February 2016, which is around the same time that media speculation concerning Telstra exploring options for its Foxtel stake reached fever pitch. We suspect NWS management is keenly interested in increasing its Foxtel stake if possible, which could explain the Company’s hoarding of cash since the separation from Fox. As already detailed, we believe any action by News Corp with respect to Foxtel is likely to increase shareholder value. It is also possible that negotiations with Telstra have restricted News Corp from repurchasing shares in recent months, and an eventual resolution of the current standoff could also free News Corp to resume share repurchases. • M&A: Rupert Murdoch has always had an acquisitive streak, and this has continued at News Corp since the spinoff. News Corp’s largest acquisitions have been Move ($952 million in 2014) and Harlequin ($414 million in 2014). The jury remains out on each of these acquisitions. The Company has also made several smaller acquisitions, principally of companies with a digital focus in the advertising, media, and real estate realms. Management has suggested any acquisitions going forward are likely to be digital properties. • REA Group Consolidation: In our view, at this stage a consolidation of REA Group would be one of the less constructive, but also most unlikely, uses of News Corp’s cash hoard. While we believe REA Group is an extremely attractive asset that has only continued to produce positive surprises, News Corp would likely have to pay a substantial premium to REA’s already healthy share price in order to close a deal. Repurchases of its own shares would be far more logical and accretive for News Corp given the current discount to NAV and REA’s growing proportion of News Corp’s market cap (est. 55% based on their respective current share prices). But News Corp has not made any substantial incremental investment in REA Group since 2001 and management has not expressed any intent to consolidate REA Group. As a parallel which helps illustrate the Murdochs’ patience, we would note Fox/News Corp has spent at least a decade contemplating the consolidation of its BSkyB stake/European Sky entities into a single wholly owned division, and the Murdochs continue to express they are in “no rush” to consolidate their majority stake in Sky.

Initial Reaction to Brexit Fallout As we headed to press this month, the world was shocked by the result of the British referendum to leave the E.U. News Corp tumbled 10.5% over the course of the two trading days that followed the results. The ultimate impact of the Brexit decision remains highly uncertain and will require endless negotiations over the coming years. But under any reasonably likely scenario, we believe the reaction in News Corp’s stock was unwarranted. News Corp’s exposure to the UK is meaningful but not alarming; the Company generated $1.6 billion in revenue from customers in the UK in FY 2015 or ~18%-19% of revenue. Obviously the - 53 - News Corporation

depreciation of the pound sterling (~11% thus far) will create some incremental foreign exchange headwinds—a familiar story for NWS in recent years. News Corp’s exposure to Britain is principally through its News UK and, to a lesser extent, its Publishing business. Any impact of Brexit on the British economy will be felt by these businesses, and advertising spending will almost certainly be disrupted somewhat by Brexit at least in the near term. But given the segments’ lower profit margins and market value in relation to NWS as a whole, News Corp’s exposure to the UK in terms of underlying profit is likely well below the revenue contribution (which would also be significantly lower after adjusting to include Foxtel results).

Valuation and Conclusion News Corp shares had already underperformed the S&P 500 by 35% from the time of the spinoff to AAF’s initial profile last June, and subsequent performance has only worsened. NWS shares have declined another 22% over the following 12 months versus a modest 3% decline in the S&P 500. This comes despite the 43% increase over the same timeframe in the value (in USD terms, to $3.5 billion) of News Corp’s largest asset, its 62% stake in REA Group. Some of News Corp’s more traditional media businesses (newspaper, publishing, pay-TV) have continued to struggle over the past year in navigating the digital transition, but News Corp’s discount to NAV has widened significantly even based on applying conservative market-level or below-market multiples on these businesses to reflect growing investor pessimism toward the industries. Looking out 2 years to fiscal 2018, we estimate News Corp’s intrinsic value is approximately $20 per share or 87% above the current stock price (i.e. 47% discount to intrinsic value) compared to our estimated 60% upside (37.5% discount) a year ago. This is certainly News Corp’s largest discount to NAV since the separation 3 years ago and possibly the largest “Murdoch discount” on NWS/FOX shares since the depths of the Great Recession, with only the most bullish of analysts estimating the discount approached 50% during the peak of the News of the World scandal in 2011.

News Corp: 83% Downside Protection? News Corp Current Market Cap $6,241 MM REA Group + Cash / Current Market Cap 83%

To illustrate the extent of News Corp’s discounted share price, we would highlight that its REA Group stake at current market value plus its $1.7 billion net cash position (adjusted to reflect the expected net litigation costs upcoming) alone account for a staggering 83% of News Corp’s current $6.2 billion market cap. This is up from 53% of News Corp’s market cap a year ago. REA Group shares currently trade at a lofty ~20x FY16E EV/EBITDA (ended June 30), but the business is a juggernaut that continues to grow revenue at 20%-plus in Australia while expanding margins and REA still has largely unmonetized potential in Europe and Southeast Asia (boosted by a major recent acquisition). We estimate REA Group shares trade at a far more reasonable ~14x EV/EBITDA looking out 2 years to FY18E. Furthermore, we would remind News Corp investors that exposure to REA Group can be hedged out. As such we value News Corp’s REA stake at public market value (arguably conservative for a 2-year outlook; this implies zero REA stock price appreciation). We also value News Corp’s U.S. digital real estate business Move at a sharp (~30%) discount to the late 2014 purchase price despite the recent signs of progress, based on projections for modest 15% EBITDA margins and a 12x EV/EBITDA multiple by 2018.

In valuing News Corp’s more secularly challenged News & Information Services segment, we project revenue to continue to decline at mid single-digits going forward while EBITDA margins deteriorate from 10.5% in FY15 to 7% in FY18. Conservatively using a newspaper industry market multiple of 5x EV/EBITDA, we estimate the segment’s intrinsic value will only total $1.7 billion in FY18. By comparison, the recent sale price of the Financial Times and The Economist suggest The Wall Street Journal alone could be worth ~$1.7 billion. We also conservatively assume current trends persist in the Publishing business and derive a $1.3 billion intrinsic value estimate using a modest 7x EV/EBITDA multiple. We value News Corp’s Australian pay-TV assets roughly on par with currently depressed U.S. cable industry market multiples (8.5x for Foxtel and 9x for FSA) despite the fact that we believe both businesses are more favorably positioned in an underpenetrated Australian market. Adding minority investments and two years of cash generation, we estimate News Corp’s intrinsic value could approach $12 billion or $20/share by FY18, implying ~87% upside to intrinsic value over 2 years.

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News Corp Estimate of Intrinsic Value, FY 2018E ($MM) FY 6/18 REA Group (61.6%) @ current market value $ 3,480 Move, Inc. (80%) @ 12x EBITDA $ 550 Foxtel @ 8.5x EV/EBITDA $ 5,128 less Foxtel external debt $ (1,616) less Telstra 50% equity interest $ (1,780) Fox Sports Australia @ 9x EBITDA $ 1,124 News & Information @ 5x EBITDA $ 1,673 Publishing @ 7x EBITDA $ 1,315 less Corporate @ 7x EBITDA $ (1,260) Enterprise Value $ 8,638 Net cash (pro forma 3Q16) $ 1,700 plus cash generation $ 1,140 Retirement benefit obligation $ (281) Rubicon Project @ market value $ 60 APN News & Media (15%) @ market value $ 85 Other Investments @ book value $ 316 Equity Value $ 11,658 diluted shares, est. 588 Intrinsic Value per Share $ 19.84 Current Share price: NWSA $ 10.62 NWS (Class B) $ 10.94 Implied upside: NWSA 87% NWS (Class B) 81%

While we believe many of News Corp’s assets would be worth significantly more in a sale than our estimates, we recognize the business is not for sale and the “Murdoch discount” is unlikely to disappear or NWS shares to approach our intrinsic value estimate in the coming two years. Nonetheless, current investor sentiment appears to be at historically extreme negatives and there are multiple potential catalysts for closing the gap to intrinsic value. According to many accounts and following a slew of executive changes at Foxtel/Telstra, News Corp is reportedly in talks with Telstra regarding reorganizing their Foxtel JV—potentially including a floatation, a sale of Telstra’s stake to News Corp, and/or a full merger with Fox Sports Australia. A purchase anywhere near the rumored price of ~8.5x EV/EBITDA would be highly attractive and would finally allow News Corp to consolidate its second-most valuable asset on its balance sheet. It could also bring major operational benefits including finally enabling Foxtel to offer a competitive triple play product and/or to explore distribution with other major telecom companies. Outside of Foxtel, almost any form of deploying more of News Corp’s $1.7 billion cash hoard (27% of the current market cap)—short of burning it in a heap—could be a positive catalyst. Longer term, we would not dismiss the possibility that News Corp considers more drastic realignment—particularly once Rupert Murdoch cedes executive control. This could include a sale or separation of the publishing assets, a spinoff/merger of the real estate assets into the REA Group stub, or a separation of the Australian pay-TV assets, among the many possibilities.

Note: Discount Moved to Class A Shares A year ago, we highlighted the 3% discount in NWS (class B voting shares) vs. NWSA (non-voting) as offering the more attractive investment vehicle for News Corp. We have made a switch in this report, as NWSA shares are down 27% over the past 12 months versus the 22% decline in NWS shares, leaving NWSA shares trading at a 3% discount. The class A shares arguably deserve a small discount purely based on fundamentals (lack of voting rights), but they also have significantly more liquidity with ~2x the number of shares outstanding

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and ~4x the average daily volume traded (reflecting the Murdochs’ control of ~40% of the B shares). As illustrated in the following chart, A-shares have traded at a premium for a majority of News Corp’s independent trading history with a significant discount only emerging since around the start of the year. We would also note that former parent company Twenty-First Century Fox’s non-voting class A shares (FOXA) still trade at a slight premium to class B FOX shares.

NWSA % Premium (Discount) vs. NWS: Recent NWSA Discount Emerged

Risks Risks that News Corp may not achieve our estimate of the Company’s intrinsic value include, but are not limited to, failure to halt declines in the news businesses; disruption of Australian growth or failure to integrate acquisitions at REA; inability to successfully transition the publishing business from print to digital while maintaining economic value; competitive pressures from new entrants in the Australian pay-TV businesses; general economic weakness and/or currency depreciation in Australia and the UK; failure to monetize the Move properties; inability of Foxtel to reach favorable distribution agreements or a new JV structure with Telstra; continued sub-optimal capital structure and/or value-destroying capital deployment; corporate governance issues due to the dual class structure and Murdoch family de facto control; and loss of key management personnel.

Analyst Certification Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our analysts’ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this report.

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NEWS CORPORATION CONSOLIDATED BALANCE SHEETS (Millions)

March 31, 2016 June 30, 2015 ASSETS (unaudited) (audited) Current assets: Cash and cash equivalents $ 1,972 $ 1,951 Receivables, net 1,254 1,283 Other current assets 679 780 Total current assets 3,905 4,014

Non-current assets: Investments 2,264 2,379 Property, plant and equipment, net 2,499 2,690 Intangible assets, net 2,229 2,203 Goodwill 3,681 3,063 Deferred income tax assets 666 219 Other non-current assets 472 467 TOTAL ASSETS $ 15,716 $ 15,035

LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 227 $ 238 Accrued expenses 1,439 1,125 Deferred revenue 378 346 Other current liabilities 604 401 Total current liabilities 2,648 2,110

Non-current liabilities: Borrowings 369 — Retirement benefit obligations 281 305 Deferred income tax liabilities 200 166 Other non-current liabilities 353 318

Redeemable preferred stock 20 20 Class A common stock, $0.01 par value per share 4 4 Class B common stock, $0.01 par value per share 2 2 Additional paid-in capital 12,425 12,433 Retained earnings 60 88 Accumulated other comprehensive loss (845) (582) Total News Corporation stockholders’ equity 11,646 11,945 Noncontrolling interests 199 171 TOTAL EQUITY 11,845 12,116 TOTAL LIABILITIES AND EQUITY $ 15,716 $ 15,035

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Disclaimers

Asset Analysis Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it should be used as a guide in aiding the investment community to better understand the intrinsic worth of a corporation. The service is not intended to replace fundamental research, but should be used in conjunction with it. Additional information is available on request. The statistical and other information contained in this document has been obtained from official reports, current manuals and other sources which we believe reliable. While we cannot guarantee its entire accuracy or completeness, we believe it may be accepted as substantially correct. Boyar's Intrinsic Value Research LLC, its officers, directors and employees may at times have a position in any security mentioned herein. Boyar's Intrinsic Value Research LLC Copyright 2016.

Copyright © Boyar’s Intrinsic Value Research LLC. All rights reserved www.BoyarValueGroup.com