Magnitude Of Fox Settlement Takes Wall Street By Surprise – But It’s Tax Deductible

Fox looks set to weather a massive payout to settle its case with Dominion Voting System. It has $4 billion in cash and generates significant free cash flow annually. The $787.5 million hit, one of the largest defamation settlements ever, isn’t likely to disturb Fox News profits.

Deadline has also confirmed that the sum is tax deductible. It’s unclear if there is any related insurance coverage.

However, one financial analyst called the figure unexpectedly large, an unpleasant upside surprise, as another big legal challenge looms. Investors are waiting for more clarity from CEO Lachlan Murdoch, likely on the company’s next earnings call, on what the settlement means.

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“Fox has enough cash. It’s not an issue from that perspective. But people were generally considering what they were going to do with this cash,” said one analyst who covers Fox.

“There was an expectation there was going to be a settlement. Obviously, there was some nervousness. It looks like it was half the value of the suit. So now people are like, ‘There’s a Smartmatic version coming for $2.6 billion. I don’t know how these numbers are derived, so maybe they get half of that too?’” said another.  Smartmatic, another voting software company, also sued Fox News and Fox Corp., as well as hosts and guests, and the case is in the discovery stage in New York Supreme Court. No trial date has been set, but it may not be until 2025.

Dominion initially sued for $1.6 billion, accusing Fox of knowingly amplifying baseless claims of voter fraud in the 2020 presidential elections.

Fox confirmed the settlement in an SEC filing today.

“On April 18, 2023, Fox Corporation (“FOX” or the “Company”) and its subsidiary, Fox News Network, LLC, entered into a Release and Settlement Agreement with Dominion Voting Systems, Inc. and certain of its affiliates (“Dominion”), pursuant to which such parties agreed to resolve the lawsuits among them for $787.5 million to be paid to Dominion. The Company made the following statement in response to the settlement:

“We are pleased to have reached a settlement of our dispute with Dominion Voting Systems. We acknowledge the Court’s rulings finding certain claims about Dominion to be false. This settlement reflects FOX’s continued commitment to the highest journalistic standards. We are hopeful that our decision to resolve this dispute with Dominion amicably, instead of the acrimony of a divisive trial, allows the country to move forward from these issues.”

There are other uses for Fox cash.

CEO Lachlan Murdoch made potential M&A the centerpiece of the company’s last earnings call after a possible plan to merge with News Corp. was scrapped due to protests by both sets of shareholders.

“We will be looking at M&A to deploy our capital,” Murdoch said. “I think we are in a strong position to capture opportunities when they present themselves.”

Also, Wall Street loves stock buybacks. Fox has been buying back stock at a rapid clip and expanded its share buyback authorization by $3 billion in Feb., announcing an accelerated $1 billion repurchase transaction and plans to buy back another $450 million for the rest of fiscal 2023. (Its fiscal year ends in June.) Wall Streeters were wondering if that might change.

Asked about any impact on staffing, costs or other as a result of the payout, a Fox spokesperson said in a statement, “We don’t expect significant operational effects or changes to our business given our cash flow, strong balance sheet and the health of our business.” 

Dominion was valued at $80 million when its private equity owner closed an acquisition in 2018, and about $250 million in the run-up to the 2020 presidential election, according to court filings and news reports. Many read a into settlement that is multiples of Dominion’s total value real trepidation by Fox of putting top executives on the stand, or of losing in court.

“I was surprised at the magnitude of the settlement,” one analyst said. Given Dominion’s size, this was the cost of preventing a public trial. The question now is how is a Smartmatic suit going to be different?  What will the judge allow or not? Will the judge decide that what Trump was is newsworthy?”

The judge in the Dominion case wouldn’t allow Fox to use newsworthiness (of Donald Trump’s claim the election was stolen) in its defense.

In the Smartmatic case, Fox is again defending coverage of the newsworthiness of Trump’s claims in its defense, while attacking damages claims as wildly inflated. The case is still in the discovery phase, but Smartmatic is seeking deposition transcripts and other documents from the Dominion litigation. A hearing on that issue is scheduled for next week. 

In a statement, Fox said, “We will be ready to defend this case surrounding extremely newsworthy events when it goes to trial, likely in 2025. As a report prepared by our financial expert shows, Smartmatic’s damages claims are implausible, disconnected from reality, and on its face intended to chill First Amendment freedoms.”

Fox News did not suffer a ratings hit when the most damaging emails and text messages were released in the Dominion case in March, and there are doubts that the settlement will have a viewership impact, either. The emails and texts, though, revealed the scramble of executives and personalities as the network’s election night call of Arizona triggered a backlash among Trump’s supporters, who turned to other networks like Newsmax and One America News Network. Dominion’s argument was that Fox was motivated to amplify Trump’s claims in a bid to win the viewers back, even though a number of news figures thought that the voter fraud allegations were bogus.

Fox News did cover the settlement on Tuesday, with host and media analyst Howard Kurtz, who was in the courtroom, providing updates. But the coverage was far less than that given to the story by other networks like CNN and MSNBC.

The network has gone cold and hot on Trump — steering away from coverage of his rallies, then featuring him in a recent sit down interview with Tucker Carlson. And Carlson himself has continued to question the legitimacy of the 2020 presidential election, telling viewers in March that it was a “grave betrayal of American democracy,” while not mentioning Dominion or Smartmatic.

One analyst predicted that the settlement won’t make a difference to cable providers, who “will continue to carry it because the audience demands it. The main impact of this is that Fox will have less cash.” A battleground in carriage negotiations has been over per-subscriber fees given the impact of consumers cutting the cord.

Robert Fishman of MoffettNathanson put out a note saying, “It isn’t clear there has been much, if any, impact of these lawsuits on Fox News’ viewership and business. Similar to the other cable news networks, Fox News’ viewership is down over the past quarter compared to last year because of the spike in viewers related to the initial Russia invasion of Ukraine in 2022 (see Exhibit 1). Looking back further, after a significant spike in 2020, Fox News has remained relatively stable, especially compared to CNN and MSNBC.”

“As far as the future of Fox News on-air talent, its passionate viewer base, and the rest of the country will need to see if there will be any changes going forward. That said, the network remains a key growth driver for the overall company.”

Fox shares ended down a hair, off 0.45% at $31.06. They were trading down more than 2% earlier in the session.

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