Market Insight

21st Century Fox confirms $80 billion bid for Time Warner

July 16, 2014

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21st Century Fox confirmed that Time Warner Inc. has rebuffed a proposal worth nearly $80 billion in cash and stock to merge the two media giants. Time Warner deemed that the offer of 1.531 to 1 of Fox Class A non-voting common shares for all Time Warner shares, and $32.42 in cash per share (roughly $86 per Time Warner share as of 15 July, in cash and stock) was not in the best interest for the company. Instead, Time Warner would rather stay the course to execute its strategic plan that has created immense value for its shareholders. The offer represented more than a 20% premium over Time Warner’s share price at the end of close Tuesday.

The unsolicited offer by Fox comes in response to the wave of consolidation occurring in the pay TV landscape. The mergers of Comcast/Time Warner Cable and AT&T/DirecTV have yet to pass regulatory approval but are already prompting the idea of consolidation among content providers to counter the enormous presence on the pay TV side that could potentially have two new companies controlling 59% of all US pay TV subscribers.

Fox’s stable of networks include Fox, The CW, MyNetwork TV, Fox News, FX, Fox Sports Networks as well as its movie studio. A merger would bring into the fold Time Warner cable networks that include TBS, TNT, as well as the premium networks HBO and Cinemax and a film studio of its own, Warner Bros. The deal would further tie in several sports deals under one roof. According to company statements, a merger would generate $1 billion in synergies due to cost savings among stuff and back office functions. 

Fox stated that since the rejection by Time Warner Cable, it has not had any further talks, but Fox and a determined Rupert Murdoch are likely to make further attempts to make the deal happen.


Our analysis

The merger between Time Warner and 21st Century Fox could form the largest cable network company in the business, if regulatory concerns are met. In fact, the overture to Time Warner fits well with 21st Century's ambitions for expansion. Fox is already involved in two potentially massive consolidations - the takeover of Sky Italia and Sky Deutschland by BSkyB, and a joint venture between Fox' TV production subsidiary Shine Group, Endemol and Core Media Group.

In terms of programming ,Fox and Warner have long histories of partnership. HBO already has long-term output deals with the Sky Atlantic channels in the UK and Germany. In the US, Fox supplies its movies to HBO. And domestically the 50/50 Warner/Viacom CW broadcast Network could co-exist with the Fox broadcast network. The possibility for consolidation of the Fox network and The CW network and/or The CW and MyNetworkTV is interesting. All three networks find themselves near the bottom of the pack of US broadcast networks, with The CW and MyNetworkTV sharing the bottom two spots. 

There would also seem to be some conflict on the cable network side - with CNN and the Fox News and Sky News networks, and with the Fox International Channels and Turner Broadcasting businesses. Some of the channel brands might be complementary (Fox no longer has kids channels, while Turner is not involved in sport outside the US) but there would be a lot of rationalisation on the sales and marketing side.

For their cable network operations, the combination would provide synergies not only in cost savings (sales staff and back office functions), but also to counter the consolidations of TimeWarner Cable/Comcast and DirecTV/AT&T. The rhetoric during both consolidations has among other things focused on cost savings for licensing cable networks, based upon the new sizes of the combined companies. 

In total, both consolidations would represent 59% of all US pay TV subscribers; their newly consolidated buying power threatens to retard the phenomenal growth in carriage fees, during FY 2013 Fox grew carriage fee revenue 21%.. The Fox/Time Warner combination would directly counter likely carriage fee reductions for 59% of pay TV subscribers and likley increase carriage fees further from the remaining 41%, setting the stage for future carriage fee fights. If this merger goes through, the remaining 41% of subscribers will likely have to bear the brunt of increased carriage fees. 

From a regulatory standpoint there are sure to be issues with carriage fees, and if done correctly the consumer could be the ultimate beneficiary. The danger to the pay TV ecosystem will likely be recognised by the FCC, but the argument to counter reductions in licence fees is still compelling given that the negotiating power that the new company will wield will likely be enough to nullify any reductions that pay TV operator scale bring.

Elsewhere on the TV side, a combined Fox/Time Warner entity would have a powerful library of scripted and non-scripted formats, ranging from 24 and The Mentalist, Big Bang Theory to The Simpsons, MasterChef to Who Do You Think You Are? But there would be a huge amount of duplication all around the world given that Endemol, Shine and Warner Bros have built international production companies.

IHS worries that consolidations like this may indeed be one of the sparks that helps to ignite the cord-cutting fire.

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