On The Money

It’s Your Move, JB

With Fox At The Door, Time Warner Chief Has Time To Think 7/25/2014 1:30 PM

With all the talk around 21st Century Fox’s pursuit of Time Warner Inc., something I fear is getting a bit lost in all the reports of chairman Rupert Murdoch’s pit-bull like approach to acquisitions – Time Warner  chairman Jeff Bewkes is no slouch either.  

 

Volumes have been written about Murdoch’s take-no-prisoners attitude, how he is not afraid to pay big prices for assets that he sees as transformational, that his vision is unparalleled. But Bewkes hasn’t just been keeping the chair warm at Time Warner. Bewkes became chairman and CEO of Time Warner in 2008 (he was president and COO from 2006 to 2007), but cut his teeth as chairman and CEO of Home Box Office between 1995 and 2002, building that premium channel from a repository for B-movies into the original programming powerhouse it is today. At Time Warner, he streamlined operations, spinning off both online company AOL and its cable operation Time Warner Cable in 2009 and splitting from its publishing unit Time Inc. earlier this year. Under Bewkes’ leadership, Time Warner has more than doubled its stock price and its market capitalization and returned billions to investors in the form of stock buybacks and dividends.

 

“I think he’s been willing to shrink the asset base to create value. He’s managed the company pretty brilliantly in that respect," said RBC Capital Markets media analyst David Bank. “He’s created a much cleaner, better company.”

 

Bank added that because any Fox deal would seem to consist mostly of Fox stock – the deal Time Warner rejected was for about $32.41 per share in cash and 1.531 Fox shares for every share of Time Warner stock– Bewkes has to decide whether that is the legacy he wants to leave his shareholders.

 

“Time Warner shareholders, the guys that signed up for the Time Warner thesis, they’re going to be inheriting Fox shares, they’re going to be inheriting Fox management, they’re going to be inheriting the Fox voting structure,” Bank said.

 

While Murdoch has a reputation of being willing to do almost anything to get what he wants – and with a recent deal to sell Fox’s interests in two European satellite companies to BSkyB, he’ll have $8 billion more to play with -- it will ultimately come down to whether investors on both side believe they’re getting what the signed up for, Bank says.

 

Murdoch has already proven he is willing to go to extremes to get what he wants – in the early part of the century he was willing to buy General Motors just to get a crack at DirecTV (he didn’t have to). And his record is mixed – his decision to pay more than $1 billion for NFL rights for Fox in 1993 was at the time considered a huge overpayment, but proved downright visionary, making Fox a major broadcaster; while his 2005 purchase of MySpace for $585 million turned out to be a bust. (He sold it in 2011 for $35 million).

 

“His industrial logic is exceptional,” Bank said of Murdoch, adding that is the least of investors’ concerns, that shareholders are more worried about how a Time Warner purchase would affect the asset they already own.

 

“As shareholders, what people do care about is the thesis to which they bought into the stock, which is the highest organic secular growth profile company in the space,” Bank said. “And depending on the level of synergies, Time Warner will probably have lower growth.”

 

Bank added in the long run, the price really doesn’t matter to Fox investors.

 

“In an abstract sense, the price paid could be a fair price paid,” Bank added, but shareholders are thinking, "‘Is it what I bought into? Is this what I signed up for?’ …Very few people, disagreed with the industrial logic.”

 

In the meantime, Time Warner bought itself a little time earlier this month when it removed a provision in its bylaws that allowed for as few as 15% of shareholders to call for a special meeting of shareholder. Now a special meeting can only be called by the CEO or a majority of directors. It said it intends to reinstate the old provision at its next annual shareholders meeting, which gives Time Warner about a year to think of a way to thwart Murdoch’s advances.

 

One way to do that would to be to continue to run the business successfully as it has for decades, and maybe do a small acquisition to prove to shareholders that it is serious about the entertainment business. Or it could give Time Warner more time to find another suitor.

 

“I personally think they are saying, ‘give us a year to operate the company, but also give us a year to negotiate our affiliate agreements without the overhang of a transaction, and if we’re ultimately going to monetize the company through a sale, let’s wait until there is a real marketplace as opposed to one bidder,’” Bank said.

 

So while Murdoch retreats to his underground bunker to think up a new way to go after Time Warner, Bewkes and Time Warner have some time to figure out what they are going to do next.

 

Murdoch has already made it well known what he wants. Now, it’s your move, J.B.