Time Warner skyrockets after rejecting Murdoch bid

Time Warner surges after rejecting an $80 billion acquisition bid from Rupert Murdoch's 21st Century Fox.

By TheStreet.com Staff Jul 16, 2014 12:24PM

A general view of the Time Warner Center in New York City © Jason Szenes/epa/AlamyBy Keris Alison Lahiff, TheStreet

Time Warner  (TWX), owner of the Warner Brothers movie studio and popular pay-TV networks TBS, TNT and HBO, was surging Wednesday after confirming it had rebuffed media mogul Rupert Murdoch's 21st Century Fox  (FOXA) bid to buy the company in a deal worth $80 billion.

Shares of New York-based Time Warner were gaining 16.4 percent to $82.70, its highest price since August, 2001, as investors buy into a deal whose offer may have to be increased before can be consummated. Fox, ever the acquirer, was dropping 1.7 percent to $33.49.

"21st Century Fox can confirm that we made a formal proposal to Time Warner last month to combine the two companies," New York-based 21st Century Fox said in a statement. "The Time Warner Board of Directors declined to pursue our proposal. We are not currently in any discussions with Time Warner." 

TheStreet.com logoThe proposal, which the New York Times reported had been in the works since June, was made public just a week after executives from most of the country's largest media and technology companies gathered for Allen & Co.'s Sun Valley conference, an annual event that has historically cemented larger industry mergers and acquisitions.

The cash-and-stock offer consisted of a combination of 1.531 of 21st Century Fox common stock and $32.42 per share in cash, valuing the proposed deal at about $80 billion.

For the moment, a marriage between two of the industry's largest companies (Disney (DIS) being the largest) has been put on ice after Time Warner's board of directors rejected Murdoch's overture, deeming the offer too low while declaring that the company was better off continuing as is, according to the Times. 

"The Board is confident that continuing to execute its strategic plan will create significantly more value for the Company and its stockholders and is superior to any proposal that Twenty-First Century Fox is in a position to offer," Time Warner confirmed in a statement. Time Warner's board also cites the "considerable strategic, operational and regulatory risks" as reason to turn down a 21st Century Fox combination. 

Before news of a potential merger broke, Time Warner had a market capitalization of just under $63 billion. The offer represents a 25 percent premium to Time Warner shares, or around 12.6 times 2013 earnings before interest, taxes, depreciation and amortization.

Should Time Warner reconsider, a combined company would be a game-changing force in the increasingly global media industry. 

Fox, which is controlled by the Murdoch family, commands a diverse portfolio of media properties led by its Fox Networks and Twentieth Century Fox Films, a television station group and international channels throughout Europe and Asia as well as ownership stakes in BSkyB and Star India. Among Time Warner's properties are its film and production studio Warner Bros. Entertainment as well as HBO, the Cartoon Network and CNN, which Fox would potentially be forced to sell to ward off antitrust issues with its Fox News division.

Murdoch's willingness to spend big to acquire Time Warner underscores his eagerness to make good on two of his biggest investments: sports programming and the international expansion of U.S. cable-TV channels.

The potential for consolidation among pay-TV providers appears to have prompted Murdoch to want to acquire more television programming. Fox plainly has its sights set on Time Warner's sports contracts and popular HBO serials, to cite only two of its most popular and coveted assets.

By owning more programming, Fox would be better able to negotiate with pay-TV heavyweights, said Wells Fargo media analyst Marci Ryvicker, in an investor note. Murdoch clearly wants more leverage in the event that Comcast (CMCSA) is able to convince regulators to approve its acquisition of Time Warner Cable (TWC), and AT&T does the same in its pursuit of DirecTV (DTV).

"We also think such an offer underscores the value of [Time Warner]'s assets, which we continue to believe the market has not fully appreciated," Ryvicker said.

Fox started Fox Sports 1 a year ago in part to aggregate the company's many regional sports operations but also to compete with ESPN, the pay-TV channel that receives the most money per subscriber from Comcast, Time Warner Cable and DirecTV. Time Warner has possession of lucrative sports contracts in Major League Baseball as well as professional and college basketball. 

However, marrying Fox's sports networks with Time Warner's non-sports programming strength could prove a headache, BTIG Research's Richard Greenfield said in a note Tuesday. A longtime media analyst, Greenfield argued that Murdoch would be better off spending billions to acquire rights to the National Basketball Association than attempting to acquire a slew of pat-TV channels that might prove to undercut his company's own programming.

"In the early stages of creating Fox Sports 1 and FXX, buying Time Warner would add to its programming challenges," Greenfield wrote. "HBO is the crown jewel asset, but imagine now you have to figure how to program TBS, TNT, Cartoon, CNN, etc. If NBA rights are critical they should spend whatever it takes to take the content away from TNT, not buy all of Time Warner to get them."

A combined 21st Century Fox-Time Warner would have had total revenue of $65 billion, dwarfing Viacom's (VIAB) 2013 revenue of $13.8 billion or even looking large against Disney's $45 billion.

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