Starboard Value CEO Jeff Smith On Stake In News Corp

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Following is the unofficial transcript from a CNBC exclusive interview with Starboard Value CEO Jeff Smith on CNBC’s “Squawk on the Street” (M-F 9AM – 12PM ET) today, Tuesday, October 17.

Starboard Value CEO Jeff Smith on stake in News Corp., push for separation of divisions

DAVID FABER: Alright, want to bring it back here to the Pierre Hotel in midtown Manhattan because we are live, as we are every year now for many years, from 13D Monitor’s Actie-Passive Conference and we are bringing you the latest activist headlines. Starboard’s Jeff Smith just wrapped up his presentation. He announced ideas that included News Corp., Fortrea, GoDaddy, which has been a position of theirs for some time, and he joins me here now, as you have every year, which I always appreciate, for some time.

JEFF SMITH: Yes.

FABER: So, thank you.

SMITH: Thank you.

FABER: Let’s start off with News Corp. You know, the news seemed to be out a little bit that you guys were taking a look at that and establishing a position there. Why?

SMITH: Yes, look, David, it’s a great business. It’s a great asset. It’s just too cheap. So, we took a position. And the company is made up of a number of assets, which I think a lot of people know, most notably is Dow Jones, which includes The Wall Street Journal and, and some other things. But they also own a real estate business. They own an interest in REA, which is publicly traded in Australia. And they own a 60, 61 percent ownership stake in REA. That was an amazing investment for them. So, it was about 20 years ago Lachlan actually saved REA. He invested about $10 million at the time for 40-something percent of REA. It’s grown to 60 percent. Today, that investment alone is worth $8 billion. And it trades. So it trades in Australia.

FABER: Right. So you know what it’s worth. It’s not a question here in—

SMITH: It’s worth $8 billion. The rest of News Corp then, given the $12 billion enterprise value, is only worth $4 billion. And the truth is, it just doesn’t make sense. It doesn’t – it doesn’t make sense.

FABER: So, how do you unlock that value if you’re News Corp.? I mean it’s not as though this is a surprise to them as well. They can do math.

SMITH: Well, yes, I think they can. They know it. I mean we’ve spoken to them. So, the rest of News Corp., again, $4 billion, that’s only four times EBITDA, which is –

FABER: Right, which is far less than, for example, what The New York Times trades at or any of the other public comps that you want to look at in terms of the news business.

SMITH: Right. Right.

Right, The New York Times trades at 15 times.

FABER: Right.

SMITH: So, they can do math. So, the question is, you know, what do you do about it and why do you do it and when do you do it and how do you do it? You know, our belief is that they’re going to want to do it. That they’re going to want to separate the real estate, digital real estate assets to be able to highlight this beautiful business for what it’s worth. They can’t be happy that their business, their crown jewel of a business, is trading at four times EBITDA. When they look at their peer, their competitor, that they’ve competed with forever, where their metrics are better than The New York Times on a lot of different fronts and The New York Times trades at 15 times, and they’re traded 4 times.

FABER: Right. I mean they have a higher EBITDA margin, I think, than The New York Times does, for example.

SMITH: They’re a higher, higher EBITDA margin, more digital subscribers, better, a lot of metrics.

FABER: They also have Move – we’re taking a look now at the screen here – move.com as well, right, which they own, I think it’s 80 percent.

SMITH: They have Move.

FABER: They own it with CoStar. There had been an attempt to potentially sell that sometime back. Would that be included in a divestiture, so to speak, of the real estate assets, or a separation?

SMITH: Well, it depends. So – so Move is realtor.com. So, a lot of the viewers might know that brand. And it’s a great business also. It’s also non-core to the media business. And Move can be sold, or it might be combined with REA in a spinout to make it a tax-free spinoff. So, there’s a lot of different choices. I think often people are saying, well, OK, but why have to your point, why haven’t – why haven’t they done it? I believe they just haven’t done it because I believe because they were a little insecure about leaving the rest of News Corp standalone for a long period of time. I mean you know, being in this industry, that being in the media industry for a while was something that people were worried about, especially in print, right?

FABER: It’s challenging. It still is challenging.

SMITH: Sure.

FABER: Even with the move to digital, successfully executed to a certain extent by The Wall Street Journal, for example. It’s still challenging though.

SMITH: Sure.

FABER: A lot of worries.

SMITH: Without a doubt. But they’ve come out of the most challenging time from their standpoint. So, I would say ten years ago it might have been something they didn’t want to do. They wanted to leave REA in with the conglomerate to help bolster the remaining business. I would say five years ago they didn’t need it as much, but we had a lot of things that happened over the last five years, which might have stalled their progress in making this separation. Now, there’s not as much of an issue. There’s plenty of cash flow. There’s plenty of scale in the remaining business. And the real estate business is non-core. And, frankly, I think, you know, Lachlan’s done an amazing job at being able to create that value, and it should be identified. It should be separated for their shareholders, for their stakeholders. This is, this is their duty. I mean they own, it’s true, they own 40 percent of the B shares.

FABER: They own 40 percent of the vote –

SMITH: Of the vote, which is the B shares.

FABER: Which is basically negative control. I mean it may not be complete control, but you’re not going to be able to replace the board here, Jeff.

SMITH: Well, you never know, but –

FABER: Really?

SMITH: You never know. I’m not saying that’s –

FABER: What exactly is it you do as strategy to get those votes then? Come on.

SMITH: Well, if you’re advocating for something that everybody wants, then that’s more than 40 percent. That being said, I don’t think you need to do that.

FABER: I’d love to see that.

SMITH: Yes. And I don’t know, I don’t know that you need to do that. I mean what we’re asking for is good for their business, it’s good for their family, it’s good for the shareholders, it’s good for their employees. Their employees have stock and stock options. It’s not good for everybody to have an undervalued stock. And this digital real estate isn’t really core to what they do. It’s not their crown jewel. It’s not their baby. It is something they rescued. It’s an amazing investment. If they separate it, you’re taking a business that’s going to then be highlighted. The remaining News Corp. business can’t trade at four times. It can’t.

FABER: Right.

Well, you — you mentioned you’ve spoken to them. So, what was their response, to the extent you can share it, when you actually shared your belief about what a separation would do?

SMITH: Well, it’s similar to what we just talked about. I mean they, obviously, they know the math. I mean this isn’t novel. We’re not the first ones to bring this up. They also would recognize that, as I mentioned, that sometime ago it may not have been the right time because the remaining business wouldn’t have been strong enough.

FABER: But you seemed to indicate that perhaps that time has passed and now there is a recognition on the part of management, who I have not spoken with, that they might be able to execute something along these lines.

SMITH: Yes. I don’t – I don’t –

FABER: Was that your hope or is that your expectation?

SMITH: It’s probably somewhere in between. So, I don’t know that they’re going to do anything. We’re going to continue to have those conversations. But I believe they should. And I believe they understand or should understand that they, again, they have a duty not only to the B holders, of which they have 40 percent, they have a duty to the A holders, they have a duty to their share — to their employees. And this isn’t overly hard to do. Versus, you know, it’s not great governance to have dual class. You know, there have been votes to declassify.

FABER: To consolidate. Yup.

SMITH: It’s something to consider as well. But there’s easier paths to create a lot of value.

FABER: Now, a year ago, of course, they were talking about trying to put News Corp. together with Fox. I would assume that’s something you don’t necessarily think would be positive for shareholders.

SMITH: We don’t think that that’s a good idea.

FABER: You don’t?

SMITH: We don’t.

FABER: Do you have any expectation they may try to entertain that again?

SMITH: I don’t know. We haven’t had that conversation.

FABER: OK. Aright, in the time we have left, let’s move on. You had a couple of others. GoDaddy’s been a position of yours for a long time. You’re still sort of pushing at them. Why?

SMITH: Yes, GoDaddy’s a great business. I mean it’s –

FABER: You’ve owned it for years now.

SMITH: Yes. A few years.

FABER: Yes.

SMITH: Yes. They’re, they’re the largest player in domain registration. So, if you go and you want cnbc.com, you have to go somewhere to get cnbc.com. And then, once you have it, you have to keep renewing it every year, in addition to all the ancillary services. So, it’s a highly sticky business. It’s an amazing business. Last year we talked about a few businesses. Last year we talked about Salesforce.

FABER: Well, Salesforce we spent a lot of time on. You started it all off right here in this interview –

SMITH: Right.

FABER: Which ended up being, my god, one of the more interesting activist brawls we saw, to the extent there was one, but you were underlining the fact that they were underearning essentially.

SMITH: Yes. And, actually, I would say, even though it’s not exactly a corollary, Salesforce is actually also a little similar to News Corp. in that running a proxy contest with Marc Benioff on the other side isn’t all that easy to do either, right? So, instead, you’re able to work with people and get people to understand what’s best for the company, what’s best for the shareholders, what’s best for the stakeholders and end up with a really terrific engagement and a terrific relationship.

FABER: We’re looking at it right now, 41 percent since you announced your stake. Not bad.

SMITH: Right. So, for Salesforce, for Splunk and for others last year, there was a move in these technology companies that were formerly fast-growing businesses to get them to refocus with the markets refocusing, to refocus on a balance of growth and profitability.

FABER: And that’s your hope for GoDaddy then?

SMITH: GoDaddy needs to, GoDaddy needs to do that. So, GoDaddy, on a growth plus profitability measure, has actually been going the wrong direction. Most technology companies are going the right direction. They’re refocused on margin improvement. And the combination of growth in margin are now much more acceptable. And you can just look at peers to see where – where you should get to. And GoDaddy’s gone in the last year from 38 to 31 percent on that metric. Their peers are at 40 percent just for median. But they have a scaled business with terrific margins that we talked about before, extremely sticky. They should be able to get to 40 percent and higher.

FABER: Right.

SMITH: And all they have to do, it’s almost, it’s very similar to Salesforce. All they have to do is decide they want to do it. And these are dials that they can turn.

FABER: If they wanted to.

SMITH: If they want to.

FABER: Yes.

SMITH: They just have to decide that they want to focus on that margin improvement, get the margins up to 35 percent plus, and they’re going to have growth plus margins over 40 percent and a stock price that does really, really well.

FABER: Jeff, we’re out of time basically. I did want to give you 30 seconds here on Fortrea because that’s the one name — it’s a small company, so I don’t want to spend, I’m not going to spend much time on it. I don’t have much time. But it is up today. Why? Why are you, why are you in there? What’s, in 30 seconds, give me the take here.

SMITH: Yes. Yes, I’m not great with time, as we talked about.

FABER: I know you’re not. I know you’re not. I wish, listen, I wish we had all day.

SMITH: Yes. Well, me too. Fortrea is a CRO, a contractor research organization. It was spun out of Labcorp, and with a great CEO. So, a CEO who’s done this before, Tom Pike. He was at Quintiles, which is now IQVIA. And the answer is, inside Labcorp they were, really weren’t focused on the margins. Again, it’s about margins.

FABER: Yes.

SMITH: And so when it’s been spun out, it’s been spun out with 9 percent margins, EBITDA margins. The peers are twice that at 18, 19 percent. And we believe that there’s an opportunity to do this. It’s a small industry. There’s only a handful of players that have the scale to compete. They’re one of them. And so we’re really excited about the wind behind the industry and we’re really excited about the margin improvement opportunity at the company.

FABER: Well, you did it, by the way. Well done.

SMITH: Ah, well.

FABER: See, you can. Jeff, thanks for, for the time, as always. We really appreciate it.

SMITH: Thank you, David.

FABER: Jeff Smith from Starboard.

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