Just the whiff of a potential media megamerger between Twenty-First Century Fox and Time Warner (NYSE:TWX) (more on that in a moment) contributed to pushing U.S. stocks on Wednesday, with the benchmark S&P 500 rising 0.4%, putting within two-tenths of a percentage point of the record high achieved at the beginning of the month. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) did set a new high on an 0.5% gain, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^COMP) was up just 0.2%.
In a press release today, Time Warner informed its shareholders that it has rejected a cash-and-stock offer from Rupert Murdoch's Twenty-First Century Fox. Time Warner also published a video on YouTube featuring chairman and CEO Jeff Bewkes, who explains why they rejected the Fox offer. (It's a media company, after all!) In response to the news, shares of Time Warner gained 17% to close at $83.13, a 1% discount to the value of Twenty-First Century Fox's offer based on today's closing price of Fox shares.
According to Time Warner's statement, Fox proposed to pay shareholders a combination of 1.531 shares of Fox Class A non-voting stock and $32.42 in cash for every share of Time Warner. Based on Tuesday's closing prices -- the last day before Fox's approach became public knowledge -- the offer was worth $84.70 per share, valuing Time Warner at nearly $75 billion.
So what does Murdoch expect to get from Time Warner in exchange for such a sum? Broadly speaking, I see two themes driving this deal.
First is scale. The combination of Fox and Time Warner would create a powerhouse in live sports broadcasting, for example, bringing together Time Warner's rights to the NBA and NCAA basketball, MLB, and professional golf to those of Fox covering the NFL, NASCAR, and the next two soccer World Cups. Sports are a key segment of television programming, because they are the last form of content that viewers absolutely want to watch live.
In movie-making, Warner Brothers and 20th Century Fox studios accounted together for a quarter of all North American box office receipts last year. Owning both would help smooth out the volatility in profits in a business that is notoriously hit-or-miss from one year to the next.
More generally, scale would help Fox maintain (or increase) its bargaining power with cable companies in a shifting media landscape; in that regard, Comcast's takeover of Time Warner Cable is a landmark deal.
The second driver is growth. According to a story from Bloomberg News, one of Murdoch's main motivations to do this deal is the pursuit of a crown jewel: HBO, Time Warner's highly regarded premium cable channel, which Fox reportedly values at $20 billion on a stand-alone basis. Murdoch apparently views HBO as the main legitimate competitor for Netflix (NASDAQ:NFLX), the streaming video and television content provider that is reshaping the way content is distributed and produced. Netflix, which has a market value of $26.6 billion, overtook HBO in terms of paid U.S. subscribers in the third quarter of last year, but it still lags behind HBO globally.
The stock price action in Time Warner suggests the market believes this story is still unfolding. We know from past experience that Rupert Murdoch is dogged in the pursuit of a corporate prey he really wants to acquire. Expect a better offer to be forthcoming.