Will Rupert Murdoch become media king?
JEFFREY MCCRACKEN, LESLIE PICKER, JOE FLINT AND MEG JAMES
Pounce. Leak. Wait.
It's the strategy Rupert Murdoch has employed in his effort to acquire Time Warner Inc., and similar to one that proved successful in the billionaire's last big media takeover.
In 2007, when News Corp. was pursuing Dow Jones & Co. — it eventually acquired the publisher of the Wall Street Journal for more than US$5 billion (NZ$5.75b) — Murdoch made a private approach to a reluctant target. Then, a leak helped Murdoch pressure the Dow Jones board to strike a deal.
Now, Murdoch's 21st Century Fox is trying to acquire Time Warner, the owner of HBO, CNN and the Warner Bros. film studio, for more than US$75 billion (NZ$86b). After an early bid was rejected, Fox's side helped leak its offer, according to people with knowledge of the matter, luring arbitragers who want a deal struck. The deliberate leak is an approach used by other dealmakers as they seek to build shareholder pressure against a target, and Murdoch and his senior team will wait to see if the same happens to Time Warner, one person said.
"It's the modus operandi that Murdoch has used, not just for Dow Jones, but lots of other deals," said Porter Bibb, managing partner at New York-based Mediatech Capital Partners LLC, a private merchant bank specialising in media and technology that also advises on deals. "He's better at it than a lot of other people who are much more sophisticated dealmakers because he has such a clear understanding of the impact media exposure gives his efforts."
In the four trading days since, more than 14 per cent of Time Warner's 882 million shares changed hands, data compiled by Bloomberg show.
Julie Henderson, a spokeswoman for New York-based Fox, declined to comment on the strategy. Keith Cocozza, a spokesman for Time Warner, also based in New York, didn't respond to requests for comment.
BILLION-DOLLAR OFFER OVER LUNCH
The plan was put in motion on June 9 when Fox President Chase Carey proposed the deal to Time Warner Chief Executive Officer Jeff Bewkes over lunch in New York, people familiar with the matter said earlier this month. Bewkes rejected the bid in a letter to Murdoch on July 8.
After various news outlets caught wind that Time Warner was a target — Fox Business News's Charlie Gasparino tweeted the next day that the company was drawing interest from Google Inc. — Murdoch and the team at Fox decided to get the full details out, the people said, asking not to be identified discussing private information.
Around 7am on July 16, Andrew Ross Sorkin, who also had been chasing the story, reported the specifics of Fox's offer. He had the price at US$85 a share and the structure, reporting it on the air at CNBC as well as the website of the New York Times.
Until Monday, shareholders with just 15 per cent of Time Warner stock could call a special meeting to replace much of the board in February, said a person familiar with the matter. With so much of its shares having turned over, Time Warner changed its by-laws to eliminate that provision, at least until its next annual meeting in June 2015, the person said.
With that option off the table, Fox will have to build a larger block of shareholders to press the board to begin talks. The by-law change was not anticipated by Murdoch's team, said a person familiar with the matter. The hope there is the move will backfire and prompt new and longer-term holders to go public in support of the bid, the person added.
The latest move isn't likely to discourage Murdoch, Bibb said.
Arbitragers — mostly small hedge funds that bet on mergers and acquisitions — have poured in. More than 120 million Time Warner shares have closed at an average of US$86 per share since the news broke, data compiled by Bloomberg show.
"People who are conservative can unload the stock because there's probably a line around the block of hedge funds and risk arbs that are willing to take the risk," said Charlie Murphy, a professor of investment banking at New York University's Stern School of Business. "There's a lot of demand out there because it's a really exciting deal."
The waiting strategem doesn't require the shareholder base to turn over entirely. What matters is that there are enough new holders wanting the company to be sold that the board can't ignore them. Many won't have an opinion on Time Warner or Bewkes's argument for independence. Rather, they've bought the company's shares at an elevated level, and don't want to lose money if the target isn't sold.
In the month before the offer was leaked, Time Warner's stock traded at an average of US$70. Investors who bought after news of the proposal came out know the shares would sink back to that level if Time Warner is able to evade Fox, so they'll join Murdoch's advisers in agitating for the deal and encouraging others to join in.
They have calculated that a transaction may happen for around US$95 a share, said a person who has taken a stake in Time Warner, which may be more than Murdoch is willing to pay.
While Fox encourages the new shareholders to back its bid, the company and its advisers — a group that includes JPMorgan Chase & Co., Centerview Partners and law firm Skadden Arps Slate Meagher & Flom, which were all on board for the Dow Jones pursuit — will also work to convince longer-term investors that a combination could benefit them too. Fox has estimated it could cut more than US$1 billion (NZ$1.15b) out of both companies' costs once they're combined, a person with knowledge of the matter said last week.
Murdoch's bid for Dow Jones was first reported by CNBC reporter David Faber. Who leaked it is not clear, according to War at the Wall Street Journal: Inside the Struggle to Control an American Business Empire, a book by Sarah Ellison that chronicles the deal.
The book does indicate Murdoch and others at News Corp. emailed and spoke openly with Wall Street Journal editors and others about the private bid. Public disclosure of the bid added pressure to Bancroft family members, some of whom backed a sale to Murdoch, according to Ellison.
Though it's 15 times the size of Dow Jones, Time Warner may be an easier target — even after its move to strengthen the company's defence — because it doesn't have a block of controlling shares owned by a single family. In Dow Jones's case, a dual-class voting structure gave the Bancroft family more than 64 percent of Dow Jones voting rights.
After three months of pressure — including public scrutiny of Dow Jones's tepid performance as a public company — a majority of the family voted to support the Murdoch takeover.
The counterargument made by Time Warner, whose advisers include Citigroup and Cravath, Swaine & Moore, is that with antitrust risk high, many of the financial benefits of the deal will be reduced as regulators press for movie studio or channels beyond CNN to be sold, people with knowledge of the matter said.
Bewkes has said Time Warner is better as an independent company, and may use his track record to make that case. Even before a stock-price surge last week, the company had produced a 114 per cent return for investors since he took over as chief executive in 2008, more than Murdoch's 90 per cent for Fox.
For Time Warner, if the shareholder turnover continues to a level the board can't ignore, the wait is probably over.
The next step for Bewkes? Call Rupert.
One big question is that whether anyone else will make a run at the entertainment giant.
“We believe that other potential suitors will sniff around,” Moody’s Investors Service Senior Vice President Neil Begley said in a report Monday. A Time Warner executive, who was not authorised to speak publicly, agreed: “These things have the tendency of bringing out other bidders.”
No friendly suitors have appeared yet. But that hasn’t stopped investors, analysts and others from drafting a wish list that includes The Walt Disney Company, Google, Apple, Amazon, and Verizon Communications Inc.
“This is more entertaining than some of the stuff these people put on TV,” said Janney Capital Markets analyst Tony Wible, who was the first to predict Fox’s play for Time Warner.
For Disney, owning Time Warner would cement its status as the world’s leading entertainment company. For Silicon Valley companies, a deal would make them instant players in the content business. For Verizon, access to Time Warner could boost its pay-TV and broadband platforms.
Not everyone is convinced that a rival bid will emerge.
“This is 21st Century Fox’s to win,” said analyst Michael Nathanson of the MoffettNathanson research firm. He expects Fox to increase its offer to US$100 a share if that is what it takes to get a deal done. Fox’s first offer was US$85 a share.
Here is a look at some of the potential suitors for Time Warner and whether getting into the game makes sense for them.
Pros: Could add Cartoon Network to its already strong kids channels, Disney Channel and Disney XD. CNN would give it a strong cable news presence. Time Warner’s TNT and TBS reach broad audiences that Disney’s cable channels don’t, and they would provide some sports rights that would complement ESPN. Marvel and DC Comics together would equal action hero domination.
Cons: HBO is a cash cow, but its programming (“Game of Thrones,” “Girls”) might be too risque for family-friendly Disney. The Burbank company has shown little interest in owning broad entertainment networks such as Time Warner’s TNT, TBS and TruTV.
Big take-away: The consensus is that while there are obvious synergies, it goes against Disney Chief Executive Bob Iger’s strategy for growing the company, which has been through acquisitions of powerful singular brands such as Pixar and Marvel. “Never,” analyst Nathanson said. “Bob’s strategy has been to target specialised content.”
Pros: Would give the search engine giant an entry into Hollywood. The company has already shown an appetite by buying YouTube and launching high-speed Internet service Google Fiber and the Google Play platform. Google could use Time Warner content to build online platforms, which would enhance its already powerful advertising engine.
“If (Google co-founder) Larry Page ever wants to get into the content business, then this is probably the best opportunity that he will have in his lifetime,” Marangi of GAMCO Investors said.
Moody’s analyst Begley said a reason that Google might wade in is because it has been “stymied by the lack of control of intellectual property. If the tech giant wants to get in the content business, this may be one of their last big opportunities,” he said.
Cons: Time Warner’s core cable businesses are dependent on the traditional television ecosystem remaining strong, and Google could undermine that. Making content is not in Google’s wheelhouse. If it does want in, there are cheaper assets to buy.
Big take-away: “Could be AOL-Time Warner 2.0,” Janney Capital's Wible warned.
Pros: Owning Time Warner would not only give Apple content for its iTunes and Apple TV platforms, it would also give it more leverage in negotiating with other studios that provide content to iTunes. A deal might further push Apple into developing a television strategy beyond Apple TV.
Cons: Apple’s focus is on its popular devices, and it is unclear how owning the content would boost that.
Big take-away: “This is a very limited universe for tech companies such as Google and Apple to shop, and Time Warner is the leader in TV production, a consistent leader in film production, and has the largest film and TV library, which makes it a perfect target,” Begley said. “But Apple has been focused on its devices.”
Pros: Amazon has been aggressively pushing into the delivery of content, making deals with CBS, Viacom Inc. and top producers, including Steven Soderbergh. The company opened Amazon Studios to invite creators to bring their projects.
Cons: Amazon seems more focused on its business of selling products, recently launching its Fire phone to compete with Apple and Samsung.
Big take-away: “Amazon is using content as a driver for its Prime subscription business,” said Blair Westlake, former head of Microsoft Corp.’s media and entertainment practice. “But you don’t need to own a content company to get access to content. You can write a big check and not take on the risk of running a production company. Making TV shows and movies requires a big roll of the dice, and most of those projects fail.”
Pros: Could borrow a page from Comcast and marry its distribution (Verizon’s FiOS video service has 6 million subscribers nationwide) with top-notch content. It would immediately make Verizon a player in Hollywood, and give its high-speed Internet customers more reasons to stream video. It would also give Verizon an opportunity to directly offer movies and TV shows to its customers.
Cons: No real synergies and is far beyond Verizon’s current business model. The phone giant isn’t a big enough player to make owning a content giant worthwhile. Verizon this year bought European phone company Vodafone Group’s interest in Verizon Wireless, a transaction valued at US$130 billion (NZ$149b).
Big take-away: “I have a hard time imagining Rupert wouldn’t outspend Verizon,” Janney Capital’s Wible said.