If Rupert Murdoch wants to cap his career as a media mogul by grabbing control of rival Time Warner, he will have to bet the company, including the family’s control over it, to succeed. Time Warner has rejected the $US80 billion cash and shares offer from Murdoch’s 21st Century Fox because the equity on offer from Fox consists of non-voting A class shares – the ones the Murdoch family have all but rejected.
The bid is an attempt to control more content, rather than more TV channels or other distribution businesses.
And of that bid for more content, the most important is the long list of highly valuable sports broadcasting contracts, which if Fox managed to control, would make its emerging Fox Sports network equal to the market leading ESPN (owned by Disney) and a dominant factor in the one remaining generator or big viewing audiences in the fragmenting media landscape (think Super Bowl).
But to do so, the Murdoch family will have to risk their 39.4% stake controlling stake in the voting B class shares of Fox (the clan controls the new News Corp in a similar fashion) held by the family trust and Rupert (who owns 1% himself).
The Murdoch’s further control Fox via a poison pill arrangement which would expand the shares on issue if a raider got to build a stake without the family’s consent. The Time Warner approach explains why the poison pill was extended last month for another year (to protect Fox against a raid by Time Warner, or someone else, such as cable magnate, John Malone).
The bid also explains why Fox hasn’t bought back any of its non-voting shares since early May – the company has been building up its cash reserves for the bid. It had just over $US5 billion in cash on hand at March 31.
From the reaction by Time Warner, (and it wouldn’t surprise if it adopts a poison pill because its lawyers are among the small group who specialise in them in New York) Murdoch and Fox will have to rework the bid to win approval.
Going hostile won’t be enough because that has to be done via a cash bid and Murdoch can only raise $US24 billion, 40%, or $US32.42 of the $US85 a share offer. The remaining 60% of the bid (1.531 non-voting A class shares for each Time Warner share) saw Time Warner immediately focus on as the weak link.
Time Warner said, it rejected the approach (called a bear hug in stockmarket parlance), "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."
That throws down the challenge to Murdoch to sweeten the offer by putting up voting shares – a move he won’t do because that would weaken his control of Fox through the two tier share structure. It also quite rightly questions the ability not of Fox’s chief operating officer in Chase Carey, but the trio of Murdoch males in dad Rupert, Co chair and son Lachlan and co chief operating officer in son James.
Rupert and James remain tainted by the News of the World scandal and other bribery claims in the UK. Lachlan is tainted by his destruction of close to half a billion dollars of cash in the struggling Ten Network in Australia, not to mention over a billion dollars of losses in OneTel and the Super League wars of the late 1990’s.
To win Time Warner by issuing voting shares would result in the major dilution of the Murdoch clan’s 39.4% stake. By some estimates a mixture of voting shares and cash would water the Murdoch stake down to less than 10%. Fox could issue a mixture of voting and non-voting, but to preserve the family’s control (in reality it only owns just over 12% of all the shares in Fox), the family would have to buy a swag of voting shares.
Murdoch’s long held an ambition to own Time Warner (he tried to buy it back in 1984), plus the growing realisation that he and his company was being left behind in the rapid consolidation of the US broadcast media is one of the reasons why he wants to buy Time Warner for $US85 in stock and cash for each Time Warner share.
The bid would see Fox paying $US80 billion for the company, and acquiring around $US12 billion in debt in Time Warner. It would be the second biggest media takeover in history after the ill-fated move by AOL to buy Time Warner in 2000 for $US180 billion.
The growing consolidation in the US, plus the better growth achieved by rivals such as Disney, have left the Murdoch main company, 21st Century Fox, struggling in the slipstream of Disney (market value more than $US150 billion,) Comcast the biggest cable and owners of NBC and Universal and the bidder for Time warner Cable with a market value of $143 billion, and more if the $US76 billion Time Warner bid is approved, and AT&T, the giant telco, which wants to buy DirecTV for more than $US48 billion (which Murdoch once controlled, but sold) which currently has a market value of $US180 billion.
Now Murdoch and his family want to jump up into that group by buying Time warner (shorn of its Time magazine print business) for a massive $US92 billion. That would lift the combined company’s value to $US140 billion, if Murdoch comes again after this rejection.
The extent of his blind ambition to get back into wheeling and dealing (after being shut out by the impact of the News of the World phone hacking scandal) is underlined by the $US30 billion difference between Time Warner’s market value and the offer price of $US92 billion.
The combined company would have revenues of more than $US65 billion, meaning more than half its market value would be blue sky, or goodwill and other intangibles.
It’s the sort of premium that will only end in write-downs and future losses – just as Murdoch’s biggest deal to date – buying the Dow Jones Company and the Wall Street Journal in 2007, (just as the GFC was starting to sweep markets) saw Murdoch pay 50% too much – nearly $US6 billion, which was later written down by just under $US3 billion.
This move again confirms that, for all his boasting in Australia this week about how wonderful this country is and how great The Australian and other papers are, print now doesn’t feature any more in the corporate future of the Murdoch family. Its main interest will be Fox.
Mr Murdoch and his sons (Lachie, the co-chair of both 21st Century Fox and News Corp and James, co chief operating officer of 21st century Fox), have relegated print to yesterday. The future is broadcast media plus film and content in the US, Europe and Asia.
That in itself is appears to be a defensive reflex against the growing threat from the internet – Google, Apple, Netflix and the giant US companies such as AT&T, the big telco which is heading into content creation, distribution and control.
But looked at another way that appearance of a defensive reaction is actually a positive because by bidding for Time Warner, Murdoch is underlining the most important point about the evolving media-internet businesses in the US and around the world – it’s all about content.
Apple, Google, Netflix, AT&T and Comcast all need content – Comcast owns NBCUniversal for that reason. CBS and Viacom, controlled by Sumner Redstone (who is even older than the 83 year old Rupster) controls some of the classiest content around the globe (CBS and its long list of sports contracts, MTV, Nickelodeon). Disney is stuffed full of content – film TV production, cable programming and hours and hours of sport in ESPN.
And if you burrow down into what Time Warner controls you find the following jewels that Murdoch is after in its content assets – HBO, the classiest cable/production business around the world (Time Warner boss, Jeff Bewekes ran HBO and is responsible for the Sopranos), CNN (which would be sold), Cinemax, football, baseball and possibly basketball contracts, gold, soccer and some minor sports.
And the latter is the real reason for the move on Time Warner – the best content in a fragmenting media world is that which assembles mass audiences (to view in as many ways as technically possible) and the best content there is for that is sport, as we have just seen with the World Cup of soccer, and we see every year with the US NFL games culminating in the Super Bowl each year.
On top of that there’s the months and months of baseball in the US, basketball, soccer and ice hockey. All generate bigger audiences each week than many other forms of content (drama, comedy, films). They are expensive, but so then are the costs of advertising on them.
Fox is looking to grab these sports rights from Time Warner to give its Fox Sports business immediate heft to take on what is said to be one of the most profitable media business in the world, Disney’s ESPN and its fat profit margins of close to 50%.
Last year Murdoch committed Fox to spending a billion dollars and more to build a national network modelled on Fox Sport in Australia and Sky Sport in the UK, by 2016. The move on Time Warner can be seen as an attempt to dramatically expand that ambition.
If Fox grabbed control of the sports rights in Time Warner, it would become as big, if not larger than ESPN, and over time, just as profitable. That would sit nicely the with other most profitable media business around the globe – Fox News.
