Time Is Running Out on Time Warner's Independence
Jeff Bewkes's plan to keep Time Warner independent could only last so long. That time may be about up.
Speculation is back that Rupert Murdoch and his 21st Century Fox will make a fresh run at Time Warner, about a year-and-a-half after its CEO Bewkes rejected the media mogul's $85-a-share cash-and-stock offer. And while it's still just chatter at this stage, don't be surprised if it comes true.
Mr. Murdoch and Mr. Bewkes know that an offer in that range would look pretty good now. Time Warner's stock ended 2015 at $64.67, down about 18% since Mr. Murdoch backed away. The company was valued at $55 billion on Tuesday morning, slightly larger than Fox at $51 billion.
The merger made sense back then and it still does. Fox and Time Warner create and supply TV content, and that side of the TV industry is under pressure and in need of the consolidation that has already swept through their rivals on the cable side.
Charter Communications is in the process of acquiring Time Warner Cable and Bright House Networks, and AT&T merged with DirecTV last year. (Mr. Bewkes spun off the Time Warner Cable business in 2009, and now Time Warner is left with HBO, the Warner Bros. film studio and the Turner cable networks, which include CNN, TNT and TBS.)
In 2014, a person with knowledge of the matter told Bloomberg News that Mr. Bewkes would be more willing to sell Time Warner after Comcast, AT&T and Verizon digested their own large transactions so that they could actively bid, in hopes of making the process more competitive. Of course, Comcast's big merger never happened. It was supposed to buy Time Warner Cable, but regulators scuttled those plans, paving the way for Charter, which is now awaiting a regulatory decision. AT&T's DirecTV deal closed in July. And Verizon paid Vodafone $130 billion for its stake in Verizon Wireless in a transaction that closed about two years ago. So these three companies' decks are pretty much clear now.
These days, it would also be much more difficult for Mr. Bewkes to summarily reject a deal. According to the New York Post, activist investors may push for a sale of Time Warner or a sale/spinoff of HBO. The Post said that Carl Icahn was among those building a stake, but the billionaire hedge-fund manager said that's not true. The other name the Post flagged was Keith Meister, who runs Corvex Management, for what it's worth. But should there be any merit to the activist talk, it means that Time Warner is probably about to go through some major changes.
In the case of a merger, a big obstacle remains: Fox and Time Warner are vastly different companies, right down to their political leanings. And because of Fox News, CNN would need to be divested if the companies did combine. There's also the matter of what Fox can afford. Its previous $75 billion offer included about $29 billion of cash. Shares of both companies currently fetch a similar valuation of about 9 to 10 times projected Ebitda.
Throwing out some numbers for a minute: If Fox were to bid $90 a share, and 35% of that were cash, it may require about $700 million of synergies just for the deal to break even, according to Bloomberg's merger calculator. Fox's shares also plunged after it confirmed the takeover proposal in 2014, which depleted the rationale for a deal. There are other longer-term benefits to one, though -- mainly a better negotiating position against the pay-TV companies that have scaled up.
Mr. Bewkes could get a nice payout. If he were to be terminated following an acquisition, he would be eligible to receive at least $88.9 million, including severance, benefits and equity that would vest early, Bloomberg executive compensation reporters Anders Melin and Caleb Melby calculate.
As for HBO, that business alone may be worth $20 billion to $36 billion, according to an estimate by Bloomberg Intelligence analysts Geetha Ranganathan and Paul Sweeney that applies peer cable network multiples to HBO's estimated 2015 Ebitda of $1.98 billion. They note that while comparisons are often made between HBO and Netflix, their growth is far apart. HBO's U.S. subscriber base has increased an average 6% over the past eight quarters, versus a rate of 19% at Netflix, home to original series including "House of Cards." It could soon surpass HBO, which makes "Game of Thrones."
Even so, HBO is still Time Warner's crown jewel, and without it, the company is a less desirable takeover target. Mr. Bewkes has also said that HBO is better off within Time Warner, so he seems reluctant to either a spinoff of that unit or a sale of the entire company. But this may be the year that he's forced to finally choose one: a split, or a takeover?