Murdoch Bids for Time Warner: What You Need to Know

The Proposal➢ Twenty-First Century Fox offered $80 billion for Time Warner,

in a bid that could reshape the media industry.

➢ Fox's proposal included 1.531 shares of its class A non-voting common shares and $32.42 in cash for every share of Time Warner. This would mean approximately $86.30 per share, a premium of nearly 22% versus Time Warner’s closing price of $71 per share on Tuesday.

➢ Time Warner rejected the proposal. However, the stock rose by more than 17% on Wednesday, as investors reacted with optimism to the news.

The Rejection Time Warner rejected the proposal based on the following considerations:

➢ Time Warner’s strategic plan will continue to drive value for stockholders.

➢ Time Warner’s industry-leading businesses hold unique value.

➢ There is risk and uncertainty as to the valuation of Twenty-First Century Fox’s non-voting stock and doubts regarding management.

➢ There are considerable strategic, operational, and regulatory risks to executing a combination with Twenty-First Century Fox.

No, Thanks

“Quite simply, the board concluded that continuing to execute our strategic plan and our business plans will create significantly more value for the company and our shareholders, and that that’s superior to any proposal that Fox is in a position to offer.”

Time Warner CEO Jeffrey L. Bewkes

Source: Time Warner.

The Rationale for a Deal

➢ Consolidation among content distributors is becoming a major risk for content producers, so consolidation among producers could be a smart defensive move.

➢ Time Warner owns enormously valuable properties, and the company is generating healthy financial performance.

➢ HBO is the crown jewel, and a highly coveted asset because of its unique content and opportunities for international growth.

Playing Defense

➢ The acquisition of Time Warner Cable by Comcast, the purchase of DIRECTV by AT&T, and rumors about a possible acquisition of T-Mobile by Sprint are examples of a clear consolidation trend among content distributors.

➢ This reduces competition among distributors, and it puts producers in a position of vulnerability when negotiating prices and fees.

➢ By joining forces, Twenty-First Century Fox and Time Warner could create a massive industry player with huge leverage when it comes to negotiating with content distributors.

Content Is King

➢ Combining Fox and Time Warner studios would create a gigantic generator of new content with massive scale advantages, both in movies and television.

➢ HBO's highly acclaimed original programming, leading presence in the U.S. market, and abundant growth possibilities in international markets make it one of the most valuable properties in the industry.

➢ Sports programming is another area that could be especially valuable for Twenty-First Century Fox. This segment is particularly profitable, and Time Warner owns the rights to the U.S. professional and college basketball leagues, Major League Baseball, and professional golf, among others.

Time Warner Is Financially Solid

➢ Revenues excluding Time Inc. increased 10% to $6.8 billion during the first quarter of 2014.

➢ Adjusted earnings per share jumped by a remarkable 26% versus the same quarter in the prior year.

➢ Management is quite confident regarding prospects over the medium term: “Our confidence is underpinned by the strength of our brands, by industry-leading scale across our businesses and by the increasing value of our engaging and globally relevant content.”

Moving Forward Rupert Murdoch, chairman and CEO of Twenty-First Century Fox, is well

known for his perseverance when it comes to corporate deals and his empire-building aspirations. Chances are that Twenty-First Century Fox may come back with a better offer in the future.

Source: Twitter: @rupertmurdoch

Regulatory Concerns

Considering the size of both companies, regulatory consent could be hard to get.

Selling CNN will most probably be required in order to get a green light and, even in that case, regulatory approval could be challenging.

Implications➢ Consolidation seems to be the name of the game in the media

industry lately, so it would not be very surprising to see sustained merger activity in the medium term.

➢ Even if a deal doesn’t go through, the offer from Twenty-First Century Fox puts Time Warner and the value of its assets in the spotlight.

➢ Investors in the industry should monitor the situation closely, since a merger could give birth to a major potential competitor with enormous strategic and financial resources.

Foolish Takeaway

➢ An acquisition of Time Warner by Twenty-First Century Fox would be a major game changer in the U.S. media industry.

➢ Although Time Warner is showing no interest at all, and regulatory hurdles could be considerable, a merger would have big advantages from a strategic point of view.

➢ Chances are Murdoch will insist on his proposal, and investors should pay close attention to these negotiations and their massive implications across the industry.

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