We’ve now spoken with sources on many sides of the Fox-Time Warner deal.
Here’s the thinking on where we are and what will happen next:
* Yesterday’s news blitz was likely a deliberate (and effective) tactical move by the Murdoch camp. Having made a significant offer to Time Warner’s board, and been rebuffed, Fox went over the Board’s heads to Time Warner shareholders. The Time Warner shareholders, who are the key constituency that both sides will now be trying to win over, reacted positively to this overture. Mr. Murdoch now has their attention, and they are eager to hear what he will say next.
* Time Warner anticipated this move and did a good job parrying it. Time Warner’s response — a cool, calm, confident, polite demurral — conveyed an effective message: We appreciate your offer. We considered it carefully. It’s not enough to get us to the negotiating table. But we’re not crazy, and a bigger number might be.
* The $US85-a-share offer did its job — got everyone’s attention — but is viewed on all sides as an opening bid. Although there is precedent for Murdoch’s opening offer to be his best-and-final offer — he shrewdly and patiently persuaded the shareholders of Dow Jones to accept his opening number, for example — this situation is different. First, Time Warner’s shareholders are professional shareholders, not private family members with competing interests. Second, Time Warner’s board is not alone in not viewing $US85 as a compelling takeout price — Time Warner’s shareholders agree with the board. The number seemed especially low considering that the bulk of payment would be delivered in Fox stock (which already has dropped in price). A source familiar with Fox’s thinking suggests Fox is open to raising its bid, but will need cooperation from Time Warner to do it (i.e., let’s sit down and talk).
* $US100 a share does seem to be a reasonable “clearing price.” Sources familiar with both sides of the deal say they would be unhappy with this number, which suggests that it’s in the ballpark. A major Time Warner shareholder also seemed ambivalent about this price, suggesting he wouldn’t be thrilled with it but would probably take it. He also offered reasonable logic to back this number up:
1) Analysts think Time Warner will earn almost $US6 a share in 2016, Time Warner will likely accelerate earnings growth thanks to affiliate-fee renewal deals, and this acceleration will likely drive a modest increase in Time Warner’s stock multiple. Put all that together, and it’s reasonable to think that Time Warner’s stock will naturally trade at about $US100 in 12-18 months.
2) Time Warner actually does have a compelling growth plan, and it will not be that hard to deliver on it. The shareholder expects that Time Warner will be able to negotiate significant long-term fee increases from its distribution partners and that these will accelerate earnings growth.
* A source familiar with Time Warner’s thinking argues that Fox would be unable to pay the price it would take to get to a deal, but a major media investor says this is nonsense. Fox is radically “underlevered,” this investor says. Fox could borrow billions of dollars to raise cash to sweeten the bid, and it could also issue new equity. These fund-raising tools could also allow Fox to shift the purchase consideration to more cash and less stock, which would make the deal more attractive.
* Fox stock dropped on the news not because Fox shareholders hate the deal but because Fox shareholders are concerned that Mr. Murdoch will overpay. The shareholders have this view in part because Mr. Murdoch is perceived to have overpaid for Dow Jones. The Fox camp is naturally working hard to persuade everyone that Mr. Murdoch will not overpay this time. A source familiar with Mr. Murdoch’s view argues that this deal is a “nice-to-have,” not a “must-have,” and that if Time Warner has delusions of grandeur, Mr. Murdoch will walk away.
* The summer timing of Fox’s overture gives Time Warner a tactical advantage, because Fox can’t immediately force Time Warner shareholders to vote on the deal. Time Warner’s annual shareholder meeting, at which a “hostile” move like this could take place, isn’t until next spring, 9 months from now. This removes a near-term threat and gives Time Warner breathing room. It also suggests that Fox’s overtures are likely to remain “friendly,” at least for the time being, and that we could be in for a long siege.
* Time Warner does not want to sell itself now: The ideal timing, from Time Warner’s perspective, would be 2-3 years from now. There are three reasons for this.
- First, Time Warner, under CEO Jeff Bewkes, has just spent five years divesting itself of all the assets it didn’t want: AOL, Time Warner Cable, and Time, Inc. The company is pleased with the assets it now has and has a plan to accelerate their growth over the next several years. Selling now would mean selling halfway through the long-term Bewkes plan.
- Second, most of the players that Time Warner considers other likely buyers are tied up with other deals or not ready to play ball. These potential acquirers include Comcast (trying to buy Time Warner Cable), AT&T (trying to buy DirectTV), Verizon, Google, and Apple (not yet convinced they need to buy a company like Time Warner). In 2-3 years, Time Warner feels, some of these players will be ready to come to the dance floor. At that point, the company suggests, it might formally put itself on the block and get a bidding war going.
- Third, Time Warner CEO Jeff Bewkes is only 62 and likes his job and his plan. He does not want to retire yet. Mr. Bewkes is way too shrewd to invoke his personal situation as a reason to rebuff the deal, but Bewkes has a lot of sway. And his lack of enthusiasm for pursuing a deal right now, sources believe, is genuine.
* Everyone agrees that the next move is Mr. Murdoch’s. He will listen carefully to Time Warner shareholders, and if he feels they would be supportive of the deal at a higher price, he will likely raise his offer in an attempt to bring Time Warner to the negotiating table.
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