Fox's Profit Machine Seen Sturdy Enough to Endure O'Reilly Exit

  • Most-watched cable network doing so well it can take the hit
  • ‘Growth in the network is overwhelming any advertiser issues’

What Bill O'Reilly's Departure Means for Fox

Don’t worry about Fox. It’ll be okay without Bill O’Reilly.

The country’s most-watched cable network is doing so well that the departure of the star of “The O’Reilly Factor” isn’t likely to be a huge financial blow. That’s even though the show was the biggest draw on Fox News, which has been 21st Century Fox’s most profitable channel, bringing in what one estimate puts at $200 million annually in advertising revenue.

“The growth in the network is overwhelming any advertiser issues” that will crop up now that O’Reilly is out and Tucker Carlson is stepping into the prime-time slot, said Brian Wieser, an analyst at Pivotal Research LLC who has a buy rating on the stock. O’Reilly took his leave Wednesday afternoon, and Fox shares fell 0.9 percent to $30.39 at the close in New York.

Fox doesn’t break out how much any one channel or program contributes to the bottom line. S&P Global Inc.’s Kagan research unit estimates that Fox News was responsible for about one-fourth of the company’s 2016 operating income, which was $6.6 billion.

O’Reilly’s exit will probably cost just a couple of percentage points in ad sales, before factoring in the network’s expected growth over the next year, Wieser said. “Investors wouldn’t really notice the impact.”

That’s not to say there won’t be any painful ripples. The hard-charging host had been on the air since the 1996 birth of Fox News. O’Reilly was “a ratings machine,” said Vijay Jayant, an analyst at Evercore ISI, in a note to clients.

Consistent Messaging

Recent history shows, though, that Fox News can handle it when individual personalities walk. There was little fallout in 2011 after Glenn Beck quit. His talk-show was replaced with the group-format “The Five” that has done so well it’s moving into a prime-time slot next week. (Beck weighed in on Twitter Wednesday, saying, “With Bill O’Reilly gone, it’s the Beginning of the End of Fox News as We Know It.”)

After Megyn Kelly jumped to NBC in January, Carlson replaced her at 9 p.m., and his ratings beat hers.

“Fox News’s dominance stems from the consistency of its messaging and the loyalty of its broader audience more than from the success of star anchors,” said Jayant, who has an outperform rating on the stock.

Dozens of advertisers pulled their spots from “The O’Reilly Factor” after the New York Times reported that Fox and the host had resolved sexual harassment allegations by paying his accusers $13 million. The report came just months after Fox News’ founder Roger Ailes resigned amid similar allegations.

How Valuable?

Fox Executive Chairman Rupert Murdoch and his sons, Chairman Lachlan Murdoch and Chief Executive Officer James Murdoch, convened on a call Wednesday morning where they decided O’Reilly’s fate, a person familiar with the situation said. The Murdochs were swayed by details that emerged during an internal investigation into the allegations by law firm Paul Weiss, the person said. O’Reilly issued a statement late Wednesday, saying, “It is tremendously disheartening that we part ways due to completely unfounded claims.”

Estimates of how valuable “The O’Reilly Factor” was vary, with Pivotal saying the show’s annual ad sales were about $200 million and Evercore putting them at half that or less. Fox hasn’t disclosed what it paid the host, though the New York Observer has reported his 2016 compensation package was $18 million.

By Jayant’s calculations, annual revenue and earnings growth will probably take a hit of less than half a percentage point as a result of O’Reilly’s leaving. He sees a decline of about 35 percent in ad revenue without O’Reilly, a similar level to the viewership gap between that show and the average Fox News primetime hour.

It’s unclear whether O’Reilly will be able to find a home with a competitor under the terms of his exit from Fox, but rival news organizations such as One America News Network and Newsmax said they’d be interested in talking with him about a new gig.

“He was the heart and soul of Fox News. He had unparalleled and unchallenged talent that he demonstrated over many years. I think he will remain a hot commodity for years to come,” said Newsmax CEO Chris Ruddy in an interview. “The problem that Bill O’Reilly is going to have is that there aren’t many conservative media outlets out there that carry as much heft.”

Ruddy cautioned that if he talked to O’Reilly about a job, he’d need to review the allegations because they are serious.

However difficult it might be for Fox to replace all the revenue O’Reilly generated, the uproar was a distraction for 21st Century Fox as it seeks regulatory clearance for its $14.6 billion acquisition of Sky Plc, the U.K.-based satellite-TV provider. That deal needs approval from the British regulator Ofcom, which will decide whether the takeover breaches British rules on media plurality and broadcasting standards, and whether Sky would continue to be a “fit and proper” holder of a broadcast license.

The U.S civil rights group Color of Change has asked Ofcom to investigate Fox’s corporate practices before approving the Sky purchase, alleging “rampant racial discrimination and sexual harassment” at the company.

“If you believe that the Sky transaction is a strategically good thing, then elements that put the transaction at risk are much more important than Bill O’Reilly,” said Pivotal’s Wieser. Fox has mitigated the damage but “this isn’t settled by any stretch. There are still issues to overcome here on that fit-and-proper test.”

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