Is the rather abrupt withdrawal of 21st Century Fox’s proposed $US80 billion bid for Time Warner only three weeks after it became public a firm and final decision or a tactical retreat?
If one were drawing on Rupert Murdoch’s history, the probabilities would favour the latter conclusion. In the past, Murdoch has relentlessly pursued his ambitions and his vision of a global media empire and generally succeeded, almost regardless of cost.
The size of the tilt at Time Warner, however, may have been too large an ambition for Fox to pursue once it became clear that Time Warner wasn’t going to engage and that the dynamics of the proposal were destructive for Fox shareholders.
In the statement announcing the proposal had been withdrawn, Murdoch referred to the sharemarket reaction to the disclosure of the proposal. Fox’s shares have fallen about 9 per cent over the past three weeks, although they jumped back to their pre-proposal levels on the news of the withdrawal.
Murdoch said that undervalued the stock and made the transaction unattractive to his shareholders. He also referred to Fox’s commitment to be disciplined in its approach to the combination and focused on delivering value to its shareholders and announced a new $US6bn share buyback program.
To gain Time Warner’s support, Fox would probably have had to lift the value of its cash and scrip offer from its original $US85 a share level to around $US100 a share -- and to have done so largely by adding more cash. The original proposal was to be funded about 60 per cent with Fox non-voting shares.
The decline in Fox’s share price since the proposal surfaced publicly points to the circularity of the problem Fox faced in pursuing the proposal. The value of the offer had dropped by about $US5 a share because of that decline.
Adding more scrip to the proposal could have pushed the price down further, and there were already concerns about the amount of debt Fox would have had to add to fund the original $US32.4bn cash component of the offer.
Fox will be heavily cashed up after its recent deal to sell its European pay TV interests into its 39 per cent-owned BSkyB in the UK: with its existing reserves it should have close to $US13bn of cash. Adding another $US9bn or $US10bn of cash to the original deal would have been a brave/risky move despite the logic of putting two such complementary businesses together.
Murdoch will, however, no doubt be watching what happens to Time Warner and its share price closely.
Before the Fox proposal became public, Time Warner shares were trading around the $US70 level. They then soared, reaching a high of more than $US88. There has been heavy turnover in the stock, with some analysts estimating that as much as 15 per cent of the company had been acquired by hedge funds anticipating a higher bid by Fox.
With Fox withdrawing, assuming the market does take its statements at face value, there is some potential for the market in Time Warner’s shares to be destabilised. (The shares fell back at one point last night to just under $US73.) This would leave its shareholders unhappy and might put pressure on its board to engage with Fox to breathe life back into a transaction which could generate up to $US1bn in cost reductions. Such a move would create the world’s largest filmed entertainment business and would give it the enlarged countervailing scale and negotiating power at a time when there is considerable consolidation occurring at the distribution end of the US industry.
News Corp Australia is the publisher of Business Spectator.