Should Google or Facebook Buy Time Warner With Fox Rebuffed?

The media giant may be for sale after its board turned down an unsolicited offer from Fox.

Jul 18, 2014 at 10:09AM

Rupert Murdoch's $80 billion offer to have Fox (NASDAQ:FOX) buy Time Warner (NYSE:TWX) has effectively put the owner of HBO, CNN, TNT, TBS, and countless other assets in play. Though the Fox offer has been rebuffed, the Time Warner board did give it serious consideration.

Murdoch is sure to try again, but an opening has been created and another company -- one with more complementary and fewer duplicate assets -- could swoop in and steal the deal from the 83- year-old billionaire.

Though they have not made any move to do so -- nor ever made a purchase on this scale -- two logical contenders would be Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB).

Were either of those purchases to happen, it would upend the media landscape while keeping the various Time Warner brands as competitors to Fox's portfolio.

Take CNN, for example, which Murdoch has said he would sell off because it competes with Fox News. The original all-news channel has struggled in recent years as opinion-based "journalism" and personalities have become more popular than straight news. If CNN was part of the Google family, however, it would have a new platform on Google News and YouTube. The same would be true if Facebook bought Time Warner, as the social media giant could push CNN news through its main site and to users on Instagram, WhatsApp, and other platforms.

If Fox buys Time Warner, it's just more media consolidation. 

Why it makes sense for Google and Facebook
Though neither Google nor Facebook is in the content-creation business, both are heavily into ad sales. The two companies rank first and second in the growing mobile ad space. In 2013, global mobile ad spending increased 105%, to $17.96 billion, according to figures from eMarketer. In 2014, mobile is on pace to rise another 75.1%, to $31.45 billion, accounting for nearly one-quarter of total digital ad spending worldwide. 

Combined, Facebook and Google dominate the mobile ad market with revenue accounting for more than two-thirds of mobile ad spending last year -- a figure that will increase slightly this year, according to eMarketer.

The two companies are also the top two sellers of traditional online ads.

Owning the Time Warner portfolio would give either company outlets to sell more advertising. Both would also be able to leverage owning original content across their existing platforms and help Time Warner's legacy brands leverage their assets online and on mobile platforms. While Fox buying Time Warner just creates a bigger version of the same thing, one of the digital giants making the deal would create a new, multi-faceted entity.

Reasons a Fox/Time Warner deal won't happen
Fox and Time Warner have very similar portfolios. It's hard to think regulators will let a deal between the two companies go through without massive concessions. 

Both companies own movie studios, and combined, Warner Bros. and Fox accounted for 27% of 2013's domestic box office ($2.9 billion), well ahead of Disney's (NYSE: DIS) 16%, Deadline reported

The joint cable portfolios would also be massive, even if the newly combined entity divested itself of CNN. In the United States, a joint Time Warner/Fox would account for 30% of cable network ad revenue, or about $15 billion, and 40% of pay-TV affiliate fees, at $16 billion. 

Those are massive numbers that make it hard to argue that the merger does not create competitive concerns. Though regulators have been lenient in recent years, it seems unlikely they would allow one company to control this much of the movie and television industries.

What Fox really wants
Multiple media reports have said that Murdoch is willing to buy Time Warner, but what he really wants is HBO, so he can compete with Netflix (NASDAQ: NFLX)

" ... I think that's the Holy Grail that Rupert had his eye on," Porter Bibb, managing partner at Mediatech Capital Partners, told Bloomberg in a radio interview. "It's a huge money maker with a huge potential. And probably the only Netflix killer that's in the world right now."

Fox values HBO at $20 billion -- 25% of the total price it offered for Time Warner, according to Bloomberg.

Time Warner may be worth more in pieces than it is as a whole. Perhaps Fox will make a bid just for HBO and its sister network Cinemax, while another entity buys the rest of Time Warner. Since Netflix is lacking in major direct competitors, regulators would likely be fine with Fox owning the brand, since it's basically the same as Time Warner owning it.

If that happens, Facebook or Google would still do well buying up Time Warner's cable portfolio as well as select other assets.  

What is likely to happen
Fox may be a publicly traded company, but it's controlled by the Murdoch family. Time Warner is a different story. Its board will act without emotion in doing what is best for shareholders. That very well may be allowing the company to be sold piecemeal to multiple buyers.

If Murdoch wants HBO, then there is a decent chance he will get it. But if that subscription-based network hits the open market, he may face serious competition.

As for the rest of the assets, Facebook or Google would be smart to get into the cable business. Most of the Time Warner portfolio is premium brands with dedicated audiences. CNN's best days may be in its past, but it's still a jewel that could be exploited better by a technology company than it has been by its traditional media owner.

One of the reasons Murdoch wants Time Warner is that a merged company could drive rights fees down for sports and make it easier to make deals with talent for TV and movies. The Fox deal would take a player off the board, which is bad for consumers and the creative community. If Facebook or Google step in, then Fox would have a new competitor that's good at things Murdoch and company are not.

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Daniel Kline has no position in any stocks mentioned. He hopes to someday be an elderly billionaire. The Motley Fool recommends Facebook, Google (C shares), Netflix, and Walt Disney. The Motley Fool owns shares of Facebook, Google (C shares), Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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