Will Fox Pay What Time Warner Wants?

Rupert Murdoch is not easily rebuffed. You don't get to be a billionaire media mogul without figuring out how to get what you want. That makes it likely that his failed bid for Fox (NASDAQ: FOX  ) to acquire Time Warner  (NYSE: TWX  ) won't be his only attempt to buy the media giant.

But sometimes, even someone as wealthy and powerful as Murdoch fails to land the prize.

It's possible that even with the tens of billions of dollars available to him, Murdoch won't have enough to make the deal happen. Even at the right price, Time Warner's board of directors could still have reservations about selling.

What would the combined company own?
The combined company would control an impressive array of cable channels and entertainment assets. These would include TNT, TBS, the Warner Bros. movie studio, the Fox Network, Fox News, two Fox-branded sports channels, the FX and FXX cable networks, and the Fox movie studios. In addition to various production studios, the combined company would also own CNN -- which Murdoch had pledged to sell -- and HBO, thought by many to be the reason the Fox boss is after Time Warner in the first place.

The Fox/Time Warner mashup would also control rights to a number of sports properties -- both leagues and individual teams. 

The combined company would have $62 billion in annual revenue before it sells off any assets.

This would be a really big company that would be able to remove a lot of leverage from creative types, sports leagues, and anyone else selling content. It would not be the only game in town, but removing one player from an already limited game board could put a check on the ever-escalating prices paid for some sports rights.   

What is Murdoch offering?
Murdoch's offer -- likely his first of at least a few -- was for $85 per share for a total of around $80 billion. The purchase price would have been paid in a mix of about 60% stock and 40% cash. Had it gone through, the sale would have been the second-largest media and entertainment deal ever done.

The largest ever also included Time Warner, and it did not go very well. In 2000, the company agreed to be purchased by AOL for $181 billion. The move came right around the time that broadband started turning AOL's core business of selling dial-up Internet access into a punchline. It's possible that the unmitigated disaster caused by that deal will make it harder for Murdoch to convince the Time Warner board that giving it another go is in the best interest of shareholders. 

It's also important to note that Murdoch offered non-voting stock, which is part of why the Time Warner board rejected the offer. "There is significant risk and uncertainty as to the valuation of Twenty-First Century Fox's non-voting stock and Twenty-First Century Fox's ability to govern and manage a combination of the size and scale of Twenty-First Century Fox and Time Warner;" the board said in a press release. 

The board doesn't exactly trust Murdoch, and it wants more money. Those are both hurdles that can be cleared.

Why did Time Warner say no?
In addition to issues of control, Time Warner wants more cash -- perhaps more than Murdoch can pay. In the same press release, the board said its own growth plan "is superior to any proposal that 21st Century Fox is in a position to offer."

The board, Bloomberg reported, feels Time Warner is worth more than $100 a share. It believes Murdoch cannot borrow enough money to finance a deal at that valuation without hurting Fox's credit rating.

Credit-rating agency Standard & Poor's agrees with the Time Warner board, according to Bloomberg. It estimates that Fox can add cash to raise its offer to no more than $93 a share without risking a downgrade of its bonds to junk. Moody's Investors Service disagrees, saying that Fox could lift its bid to $105 a share by borrowing as much as $21 billion and still maintaining an investment-grade bond rating.

Murdoch has not commented on whether he will increase his offer, but Reuters reported Saturday that he was willing to compromise on the control issue by offering Time Warner shareholders seats on the new company's board.

Time Warner is basically daring Murdoch to make an offer he can't afford. Whether he will, or whether the board will meet somewhere in the middle, remains to be seen.

Can this deal happen?
Federal regulators have approved a lot of big deals, but the recent net neutrality hearings suggest that the Federal Communications Commission will apply greater scrutiny if the public takes notice. Whether that will happen is a big question. Does the average "Major Crimes" fan know who owns TNT? Does HBO's devoted subscriber base have any idea it's owned by Time Warner?

It's likely that even if Murdoch can make a deal while preserving his company's credit rating, one of his first acts will be to shed assets. Some of that would almost certainly serve to appease regulators, but some would occur to replenish the coffers and avoid having a cash-strapped company with limited flexibility.

Time Warner may be worth more in pieces than it is as a whole, which makes you think the board should consider breaking up the company. It has been reported that HBO alone is worth $20 billion, and that the pay channel is the jewel Murdoch is after as he believes it's a possible Netflix killer.

It might make sense to sell the pay service to Murdoch and let him take on the streaming-content giant. That would create more competition, rather than less, so regulators would be more likely to let that part of the deal happen.

As for the rest of Time Warner, CNN and the rest of the Turner Channels are valuable assets that CBSComcast, and Walt Disney are all likely to bid for -- though there would be regulatory concerns to differing degrees in all three cases. It could make a separate deal for the movie studios, then sell the rest of the pieces. That might put shareholders in a much better position than they would be in if it sold to Murdoch in a deal more than half-based on the stock of a company that will be leveraged within an inch of its life.

A deal should happen, just not one that gives Murdoch everything he wants. 


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