Time For Time Warner To Get Defensive

| About: Time Warner (TWX)


Time Warner needs to make its own acquisition to fend off Twenty First Century Fox.

CBS offers immediate synergies, including some that aren't being talked about.

AMC offers a small acquisition that Time Warner could greatly improve, with increased carrier rates.

Time Warner has exciting road with monetization of DC Comics brand.

Shares of Time Warner (NYSE:TWX) were up over 20% in last week's trading session. The large move came from news that Twenty First Century Fox (NASDAQ:FOXA) made an unsolicited bid for the company. Time Warner's turn down of the offer has led to speculation of an increased bid or a defensive move on Time Warner's part. Here is a look at the smartest moves by Time Warner if it is serious about not uniting with Fox.

The smartest and easiest acquisition in my mind is CBS (NYSE:CBS). The deal would give Time Warner a huge presence in both broadcast and cable television and also slightly boost its Warner Brothers film division. The combination would unite HBO and Cinemax with Showtime, three of the largest premium cable channels.

There are immediate synergies from a content perspective. CBS and Time Warner jointly own (50/50) The CW, a cable network. The CW continues to rise in popularity with shows like The Vampire Diaries, Supernatural and Arrow. Upcoming shows like iZombie, The Messengers, and The Flash should also boost ratings and the overall value of the network. For Time Warner, the channel is quickly becoming a launching pad for some of its DC Comics content (iZombie, The Flash, Arrow).

While some analysts and experts have pointed out The CW as a reason for the acquisition, they have missed other combination benefits from CBS and Time Warner.

Warner Brothers television segment is one of the strongest in the business. The company makes shows for all of the major networks, something no other media company can claim. Several of the segment's hit shows air on CBS through deals with Warner Brothers. The combination of CBS and Time Warner would increase the total revenue earned for these shows, as Time Warner would get direct access to the strong advertising dollars collected. Hit shows on CBS from Warner Brothers include The Big Bang Theory, 2 Broke Girls, The Mentalist, and Mike & Molly.

One of the big reasons people think Fox made a bid for Time Warner was sports. Time Warner has strong content deals with major sports including the NBA, and College Basketball. CBS on the other hand, has deals with the NFL, College Basketball, College Football, and the PGA. The combination would unite the television rights for the NCAA Tournament through 2024.

Back in 2010, CBS and Time Warner signed a $10.8 billion 14 year agreement with the NCAA. The deal gave both companies the television rights for certain March Madness games. The NCAA Championship and Semi-Finals now rotate each year between CBS and TBS. Time Warner would no doubt love to have the rights to this highly watched event every year.

A combination of Time Warner and CBS would actually unite two companies who have recently spun off divisions to become financially stronger. CBS spun off its Outdoor business as CBS Outdoor (NYSE:CBSO), a real estate investment trust. Time Warner spun off its struggling magazine division as Time Inc. (NYSE:TIME). Time is best known for magazines like Sports Illustrated, People, Time, and Entertainment Weekly. I think a deal to acquire CBS could actually benefit Time Inc. through all of this as well.

CBS owns Simon & Schuster, one of the largest book publishers in the United States. Time Warner currently has no business in books, other than its DC Comics division, and could easily sell this asset to Time Inc. to help its former brand. The combined company would give Time Inc. a focus on both books and magazines, and an increasing presence in digital media.

Time Warner would likely have to make a big move like acquiring CBS to get noticed and back-off Fox. However, I believe the company could also make a play for a $5 billion company, like AMC Entertainment (NASDAQ:AMCX).

AMC is of course best known as the channel that "The Walking Dead" is on. The channel has also been home to shows like Breaking Bad, Mad Men, Turn, and The Killing. Upcoming shows include Better Call Saul, a Walking Dead spinoff, and Preacher.

AMC's problem is its carrier prices paid by cable companies continue to be extremely low. AMC, which owns a huge hit show in The Walking Dead, gets only $0.29 per monthly subscriber. Other AMC owned channels IFC ($0.21), Sundance ($0.16), and WEtv ($0.12) all get low amounts. Together, a bundle of all four AMC owned channels gets $0.78 a month for AMC Entertainment.

With the backing of Time Warner, AMC could quickly see its carrier rates rise. AMC would also see a new content provider in Warner Brothers, which has been turning out hit shows for quite some time. Current Time Warner owned channels get much higher rates.

· TNT: $1.21

· Cartoon Network: $0.20

· TBS: $0.59

· CNN: $0.57

Time Warner would be able to combo its channels with AMC channels and provide better leverage. I imagine a duo of TBS and AMC, with some of the largest viewership numbers for the coveted 18-49 age group would be hard to mess with.

What's better for Time Warner shareholders is an acquisition of AMC right now would come at the perfect time. Shares are down 23% from their 52 week highs and actually are trading down 1% in 2014. All of this bearishness comes as AMC lost Breaking Bad and loses Mad Men soon from its lineup. However, a new lineup of shows, including a spinoff of The Walking Dead, should provide future excitement. AMC shares also trade at a reasonable 13.8 times forward earnings. Time Warner would likely have to pay a premium up to $80 a share, considering shares traded as high as $78.39 in the last fifty two weeks.

Time Warner officially rejected the unsolicited proposal from Twenty First Century Fox, calling it "not in the best interests of Time Warner or its stakeholders." The offer price was $32.42 cash and 1.531 shares of FOXA for every share of TWX. That values Time Warner at over $80 a share. Many believe a new deal will come in with a higher valuation and possibly a larger percentage of the deal coming in the form of cash. Time Warner cited the large size and scale of the combined companies making it a risky move. Time Warner was also worried about regulatory risks. If they are serious about not being acquired, Time Warner needs to quickly go on the offensive and make its own acquisition.

Time Warner remains a media giant with or without a deal. The company operates with three business segments: HBO, Turner Broadcasting, and Warner Brothers.

HBO is the owner of the premium cable channels HBO and Cinemax. HBO is the home to hit shows like Game of Thrones, True Blood, Girls, and True Detective. Game of Thrones continues to break viewership figures for HBO.

Turner Broadcasting includes channels like CNN, TNT, TBS, Cartoon Network, and truTV. TBS is the number one cable channel for primetime viewership in adults aged 18-49 and 18-34, two key advertiser demographics.

Warner Brothers is the company's television content and movie segment. The segment creates over 70 television shows, aired on different cable and broadcast networks. Warner Brothers also is one of the top grossing movie studios, with $1.9 billion domestic and $5.0 billion in total box office receipts for 2013. Warner Brothers is also the housing segment for DC Comics and its related characters.

Here is a look at fiscal 2013 and first quarter 2014 earnings:

Fiscal 2013


FY 2014 Rev.

FY 2013 Rev.

FY 2014 Op Income

FY 2013 Op Income


$10.0 billion

$9.5 billion

$3.5 billion

$3.3 billion


$4.9 billion

$4.7 billion

$1.7 billion

$1.5 billion

Warner Bros.

$12.3 billion

$12.0 billion

$1.3 billion

$1.2 billion

Time Inc.

$3.4 billion

$3.4 billion

$0.4 billion

$0.5 billion

First Quarter 2014


Q1 2014 Rev.

Q1 2013 Rev.

Q1 2014 Op Income

Q1 2013 Op Income


$2.6 billion

$2.5 billion

$0.9 billion

$0.9 billion


$1.3 billion

$1.2 billion

$0.5 billion

$0.4 billion

Warner Bros.

$3.1 billion

$2.7 billion

$0.4 billion

$0.3 billion

Time Inc.

$0.7 billion

$0.7 billion

-$0.1 billion

-$0.01 billion

As you can see, Warner Brothers is the company's strongest segment with its strong performance in movies and television. However, it is actually the Turner cable television segment that makes up the largest chunk of profits. In fact, Turner made up a larger chunk of operating income than the other three business segments combined.

Time Warner continues to be a favorite media play of mine. I have been quite bullish recently, citing the potential of the DC Comics brands shifting to movies and television. I compared the move to how Disney has milked Marvel into a cash cow. The key exception here is Time Warner owns the rights to all of its DC Comic characters, where Marvel had already licensed out popular names like Spider Man, X-Men, and Fantastic Four before Disney became involved.

Combining this cash rich segment with a company like CBS or AMC makes sense. Time Warner would have great leverage with AMC to increase the amount charged for the channel by combining it with its strong cable lineup. On the other hand, with CBS, Time Warner would be able to offer advertisers access to the leading broadcast channel and many demographically strong cable channels at the same time.

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.

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