In announcing the consummation of a deal to vend its European pay TV interests into BSkyB on Friday, Rupert Murdoch went out of his way to emphasise 21st Century Fox’s commitment to fiscal discipline. Time, or rather Time Warner, will tell how that’s defined.
The deal under which 21st Century Fox will sell its 100 per cent-owned Sky Italia and 57 per cent interest in Sky Deutschland to the 39 per cent-owned BSkyB isn’t directly related to Murdoch’s ambition of acquiring Time Warner.
It has been envisaged for a long time and makes commercial sense, creating far more scale and growth opportunities for BSkyB, which operates in a more mature and competitive pay TV market.
It will, however, help Fox as it stalks Time Warner because the deal does release cash for Fox and therefore helps reduce the amount of net debt it would eventually have to take on if its tilt at Time Warner succeeds.
Under the terms of the deal announced on Friday Fox will receive $US8.6 billion of cash and BSkyB’s 21 per cent interest in National Geographic Channels International, in which Fox already has a 52 per cent interest. About $US900 million of that cash will be reinvested in BSkyB by participating in its $US2.4 billion or so equity raising for the deal in order to maintain Fox’s 39 per cent shareholding.
That leaves Fox with net after-tax cash proceeds from the deal of about $US7.2 billion, lifting its cash reserves to about $US12.7 billion.
Fox’s president, Chase Carey, said the group would continue its share buy-back program, with the details to be announced with the group’s results on 6 August, so some of that cash may be used to buy back shares – and support the market in them.
Murdoch said the program would be executed “regardless of any potential acquisition or investment activity” and that Fox’s “number one priority is increasing shareholder value in a disciplined manner and, as result, we will only consider transactions that fully support this objective.”
The BSkyB deal might have occurred independently of the attempt to acquire Time Warner, but it helps.
Last month someone let it be known that Fox had approached the Time Warner board, outlining an offer of $US85 a share, or $US85 billion in total, for the group.
Time Warner rejected the bid, both because it felt the price was too low and because of the proposed composition of the offer. Fox outlined a bid where 60 per cent of the consideration would be in the form of its non-voting stock, with the rest – about $US32.4 billion -- in cash.
Since then the market has been speculating that Fox will need to go to about $US100 a share, which would add about $US13 billion to the price-tag and funding requirement, although Fox is said to regard something less than that – around the $US95 a share level – as the limit to its willingness to increase the offer. It might also take an increase in the proportion of cash in the offer to put real pressure on the Time Warner board.
That’s why the cash released from the BSkyB deal will help -- it gives Fox the ability to throw a bit more cash into the bid without having to borrow the full amount of any increase. Fox’s most recent quarterly report shows debt of about $US19 billion, while Time Warner had debt of just over $US20 billion and $US3.5 billion of cash.
Even if some of Fox’s $US12.7 billion cash hoard is devoted to buying back its own stock that would also support its stalking of Time Warner by putting a floor under its own share price and therefore the value of the equity component of its offer.
Fox has also indicated, for anti-trust reasons, that it would sell Time Warner’s CNN cable news service if its offer were successful. Estimates of CNN’s value range from about $US6 billion to $US10 billion.
That value could notionally be factored into Fox’s bid calculations, in effect meaning that it could provide roughly half the cash requirement for the offer from its own sources, reducing the amount of extra debt it would need to take on. It is thought to be anxious to maintain its investment grade credit rating.
Since the approach to Time Warner was leaked Fox’s shares have, unsurprisingly, fallen and Time Warner’s have risen. Fox’s shares are down about 4.5 per cent and Time Warner’s are up almost 20 per cent, almost touching the foreshadowed bid level.
That price rise won’t disturb Fox because it has occurred against the backdrop of quite heavy turnover. There are estimates in the US that as much as 15 per cent of Time Warner’s capital is now held by hedge funds, a proportion that will inevitably rise unless Fox walks away.
Time is, for the moment at least, on Fox’s side. The build-up of holdings at levels so far above the price at which Time Warner shares were trading before Fox’s approach was revealed will gradually destabilise the Time Warner register and steadily increase the pressure on its board to negotiate and agree to a revised deal.