Television Business International

Analysts predict Fox/Time Warner ‘bloodbath’

Analysts have warned of a “bloodbath” and rising pay TV costs for US consumers should 21st Century Fox’s mooted takeover of Time Warner go ahead, while also noting the combined entity’s ability to take on the likes of Netflix.

Rupert Murdoch headshotYesterday, CNBC broke news of the offer, which was tabled earlier this summer that, if accepted, would have seen Rupert Murdoch’s 21st Century Fox to acquire the entire Time Warner business.

The offer totalled around US$86.30 per share, which was a significant premium on Time Warner’s closing share price of US$80 on Tuesday. Upon news of a potential deal, that share price leaped 20%, though sat 16% up at US$83.13 at press time.

Time Warner flatly rejected the offer, but many commentators already believe a deal will be pushed through. However, analysts have significant concerns should this go ahead.

“There could be a bloodbath if this merger goes through, as some consumers will likely have to bear the brunt of carriage fees which the newly formed company could grow at record rates,” IHS Technology analyst Erik Brannon noted in the wake of news of Fox’s approach.

In Europe, the addition of HBO to Fox-backed Sky’s pay TV businesses would be a good fit should a merger happen, and the combined content output of the new business would offer a “hard-to-beat library of scripted and reality shows”, said another IHS analyst, Tim Westcott. “But there would be a huge amount of duplication all around the world given that Endemol, Shine and Warner Bros have built international production company networks,” he added.

Westcott also identified a conflict on channels side of a merged entity. He said: “There would also seem to be a lot of conflict on the 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 but there would be a lot of rationalisation on the sales and marketing side.”

Fox had planned to sell news channel CNN in order to appease regulators, who would have serious reservations considering it would have sat alongside rival Fox News, according to a New York Times report.

Research specialist Ovum, part of TBI publisher Informa, highlighted the fact that Fox needs to react to the changing media landscape and wave of mega-mergers that are in the offing.

“In North America, the proposed deal has to be seen in the context of consolidation among the major media players, with the likes of Fox needing to respond to the planned mergers of Comcast and Time Warner Cable and AT&T and DirecTV by becoming larger players themselves and strengthen their position in all-important carriage-fee negotiations,” Ovum senior analyst Ted Hall told TBI.

He added: “A merger of Fox and Time Warner would also leave the company in a good position to respond to the potential shift towards a-la-carte OTT-video services. Strategic shifts in both the US and Europe have seen both operators and content providers experiment offering access to their services on an SVOD basis without the need for a traditional TV subscription. Fox-Time Warner would be well-placed to offer a highly competitive online service if it was deemed necessary and viable.”

Jeff Bewkes1Time Warner rejected the US$80 billion takeover offer from 21st Century Fox in part, it said, because of doubts its rival could manage a US$65 billion-revenue group.

21st Century Fox planned to finance the deal by raising US$24 billion, and claimed a combined group would lead to around US$1 billion in cost savings through staff cuts and back-office functions.

However, following consultations with financial and legal experts, Time Warner management decided “it was not in the best interests of Time Warner or its stockholders to accept the proposal or to pursue any discussions with 21st Century Fox”.

It listed a range of reasons for the rejection. Among these were that it felt its own strategic plan would “continue to drive significant and sustainable value” for shareholders, that the value of its assets “is only going to increase” and that there were “considerable strategic, operational, and regulatory risks” to a deal.

Time Warner, whose CEO Jeff Bewkes (pictured above right) met with 21st Century Fox president and COO Chase Carey (pictured below left), said in a thinly-veiled dig at the 83-year-old Fox CEO and chairman Murdoch (pictured) and his inner circle that 21st Century Fox would struggle with a company that would pull revenues of US$65 billion a year.

“There is significant risk and uncertainty as to the valuation of 21st Century Fox’s non-voting stock and 21st Century Fox’s ability to govern and manage a combination of the size and scale of 21st Century Fox and Time Warner,” the firm’s statement claimed.

CNBC reported the fact the Fox offer was for non-voting Class A stock, was a key sticking point. This would effectively have handed the Murdoch family control of the business, as is the case with Fox and other Murdoch-controlled businesses such as BSkyB. Conversely, Time Warner has always been an independently-operated company.

Chase careyThe creation of a combined group would have wide-ranging effects of the global media landscape and wield virtually unmatched power on the market.

It would own assets such as the Fox Networks Group, Turner Broadcasting System and its international business, the Fox and Warner Bros. productions studios, premium cable net HBO, US basic tier cablers including TNT and FX, Fox International Channels and controlling stakes in BSkyB, Sky Deutschland, and Sky Italia – the latter three themselves currently the subject of a massive merger.

It would also potentially own the merged Endemol-Shine Group-Core Media business that it Fox currently in talks with Apollo Global Management to create. That would be by far the biggest coming together of independent production business in global television.

Time Warner’s board also noted the firm had delivered a shareholder return of more than 150% since the business broke away from its previous mega-merger partner, AOL, in 2008-9.

The story of AOL Time Warner is now considered a legendary cautionary tale in media circles after the partnership lost virtually all of its original value in the wake of dot-com bubble bursting. This appears to have influenced Time Warner’s response to the Fox approach.

Should shareholder enthusiasm drive through a deal at some point in the future, it would be a crowning glory for Murdoch, whose main rival while building Fox into one of the world’s largest media groups was Turner founder Ted Turner.