Fox And Time Warner Put Media Chess Board Pieces In Motion

| About: Time Warner (TWX)

Summary

Fox has slightly better than even chance to prevail.

Deal will cost Fox more, and TWX will resist.

Many other media companies affected.

It is still too early to know whether Rupert Murdoch will succeed in taking over Time Warner (NYSE:TWX). There's no question, though, that this is a bold and in many respects sensible move on the part of 21st Century Fox (NASDAQ:FOXA). At this juncture, the likelihood of success, in my view, is somewhat greater than 50%. The Time Warner management tree has been shaken, and the board and management at Time Warner appear to have been caught flat-footed.

Mr. Murdoch is known for his tenacity and obsessiveness in such matters, and he will be no different this time around. He also already has financing of around $24 billion arranged and can still adjust his bid higher if need be.

How did TWX get into this situation? Shrinkage through asset sales, too much focus on share repurchases rather than strategic acquisitions, complacency and comfort, and the troubled residue of the disastrous AOL deal at the turn of the century.

Yes, TWX shares have risen sharply since ending 2012 at around $28 and trading above $70 earlier this month. The businesses have performed relatively well, and heightened investor interest in media deals (spurred by Comcast (NASDAQ:CMCSA) (CMCSK)/Time Warner Cable (TWC) and AT&T(NYSE:T)/DirecTV (DTV) have also propelled the shares higher. The jewels in the TWX portfolio include HBO, sports rights, cable networks, the massive film library and studio, and the leading television program production/syndication factory.

Although many observers believe that HBO is the asset most coveted by Mr. Murdoch, with the sports rights second in importance, my view is that the order of importance ought to be reversed. I'm not convinced that HBO isn't already rather mature in its prospects for growth. If Fox ups the bid to $100 billion (from around the $80 billion that the TWX board rejected), it then runs a substantial risk of overpaying and taking on too much debt relative to expected benefits in a probable rising interest rate environment. A major reason that this deal can even be contemplated is that thanks to the Fed (see "In Hotel QE You Can Check In But You Can't Check Out," SA November 20, 2013) borrowing costs for large companies has been de minimus.

Still, Mr. Murdoch is not home free in this deal. TWX was correct to reject the deal if only because the cash portion (40% or so of total value) is too low a proportion in view of the dual class ownership of Fox in which the Murdoch's have much more voting than economic interests. The Murdoch's control the company with a 38% stake in voting B shares and only offered non-voting A shares in the proposed deal. To TWX shareholders, this structure is unacceptable and rightly so in my opinion.

It might also be argued that bulking up in the movie studio, TV program production, and many other areas including Turner cable networks will not lead to much additional negotiating clout with distributors. As with a maturing HBO, $100 billion may turn out to be too much to pay for the relatively small increase of negotiating leverage that might be gained.

And last but not least, TWX management seems likely to turn hostile to any further marriage proposals and throw sand in the gears of any potential acquirers who, conceivably, might include Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) or Apple (NASDAQ:AAPL), just to speculate.

Sand in the deal gears might include but is certainly not limited to making high priced acquisition bids for other players in the media space. That is, TWX might decide to bulk up itself by going after Scripps (NYSE:SNI), Discovery (NASDAQ:DISCA) and AMC (NASDAQ:AMCX). A long shot might even include a bid for Sony's (NYSE:SNE) film studio. How about bidding for Netflix (NASDAQ:NFLX), which TWX should have already done a long time ago? The variations on this theme are many, and the outcome is uncertain.

Although Disney (NYSE:DIS) seems unlikely to be as actively or immediately involved in this deal-making frenzy, it will surely be watching and waiting with great interest. The pressure this time, however, appears to be more on Viacom (NASDAQ:VIAB) and CBS (NYSE:CBS), both of which will feel compelled to not just stand there but to do something. Something for CBS might involve purchase of the TWX cable network CNN, but also possibly an acquisition of one or more of the aforementioned public cable network companies. Something might also include a re-merging of Viacom and CBS.

The other basic assumption made by all seems to be that the good times keep rolling along. The world economy will not hit any major potholes, the major central banks (Fed, ECB and BOJ) will continue to provide endless liquidity, and there won't ever again be a pervasive down market or a crash. Good luck gambling on all of those events.

In summary, it appears that Mr. Murdoch has a somewhat better than even chance of succeeding in his pursuit of TWX. But if so, he'll end up paying more - maybe too much more (i.e., suffer the "winner's curse"). It is also important to remember that these types of deals tend to arrive close to the end of a business cycle. For stock market bulls, this is not a good sign.

What is certain is that TWX management has now been both shaken and stirred and that, as a result, many major media company chess board pieces will soon be moved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.