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Time Warner rejects bid from Murdoch’s Fox

A comparative image of the main assets owned by Time Warner Inc. and Rupert Murdoch.
Tycoon Rupert Murdoch seen likely to pursue acquisition despite rebuff              

LOS ANGELES - Even though Rupert Murdoch’s US$76 billion bid for rival media giant Time Warner Inc. has been rejected, that doesn’t mean the way you watch TV shows and movies will stop changing any time soon.

The more must-have channels like HBO and Fox News Channel are assembled under one company, the stronger that company’s bargaining position in demanding licensing fees from the TV distributors, no matter how big they get.

The cash-and-stock bid by Murdoch’s Twenty-First Century Fox Inc. was partly meant to counter consolidation among TV distributors like Comcast-Time Warner Cable and AT&T-DirecTV. Much of the value is in the television channels because of the ever-increasing fees they are able to command from cable and satellite TV providers.

Disputes over such fees have led to temporary blackouts of popular channels from various systems.

The Comcast-Time Warner Cable and AT&T-DirecTV deals are both undergoing regulatory review. In disclosing the rejected bid Wednesday, Time Warner and Fox indicated that their talks were over, but analysts don’t expect Murdoch to give up. The offer was worth about US$86.30 a share based on Tuesday’s closing price.

Fox’s willingness to raise its offer is contingent on Time Warner engaging in talks again, sources said, adding that Murdoch hasn’t been directly involved in discussions. A deal would reshape the media industry by giving the TV-and-film companies bargaining power in negotiations with cable operators such as Comcast and Time Warner Cable, which are in the process of their own merger.

By making a higher offer, which would exceed US$75 billion, Fox would seek to pull in Time Warner assets such as the TNT and TBS cable networks and premium channel HBO to add to its own stable of media properties, including the Fox movie studio, broadcast network and 24-hour news channel.

While TBS is alluring to Fox, HBO is seen as a major attraction and is being valued at US$20 billion, according to one of the people with knowledge of the matter. Fox views Time Warner’s revenue growth potential in HBO and international properties, the person said.

The proposal Time Warner rejected included 1,531 Fox shares and US$32.42 in cash, Time Warner said yesterday in a statement. The transaction would be risky for regulatory and operational reasons, and Time Warner’s assets will increase in value if the company continues on its own, it said. “The board is confident that continuing to execute its strategic plan will create significantly more value for the company and its stockholders and is superior to any proposal that Twenty-First Century Fox is in a position to offer,” Time Warner said. In a separate statement, Fox confirmed it made a formal proposal and said it’s not in current talks with Time Warner.

To appease antitrust regulators, the companies would sell CNN, according to a person with knowledge of the matter, since Fox already has Fox News. CNN could fetch about US$6 billion in a sale, the person said.

Fox and its advisers would also tell regulators that a Fox- Time Warner deal should be allowed to go through given consolidation in the cable industry, including the proposed deal to combine Comcast and Time Warner Cable, the person said.

Goldman Sachs Group Inc. and Centerview Partners LLC are advising Fox, the person said. Time Warner said it was being advised by Citigroup Inc. and Cravath, Swaine & Moore was providing legal counsel.

If talks resume and a takeover succeeds, analysts see some possible consumer benefits.

TV everywhere a push

A combination could accelerate the industry’s “TV Everywhere” push, in which traditional media companies make their channels available online as part of a TV subscription. It’s the pay TV industry’s answer to the rise of streaming services such as Netflix, YouTube and Amazon.

The hang-up in making those channels available online has partly been licensing deals with content producers. A unified company with an even larger suite of channels from TBS to FX could make such deals standard industry-wide. Apps modelled after Time Warner’s successful HBO Go could also be applied to more networks.

“A player with more scale would be able to work on that and make digital content offering more user-friendly to the consumer,” Nomura analyst Anthony DiClemente said.

Theatre exclusivity

With a North American box office market share of around 30 percent, a combined Warner Bros.-20th Century Fox movie studio could push movie theatre companies to shorten the time between when a movie hits theatres and when it’s available for sale or rental through digital outlets like iTunes.

A shortened window helps studios spend less money on marketing because they wouldn’t have to advertise each time a movie becomes available on a different platform. Theatre companies have pushed back, as earlier digital release times could cut into ticket sales.

“They would have a lot of ability to experiment with new release patterns for movies,” FBR Capital Markets analyst Barton Crockett said.

ESPN getting challengers

While there’s no guarantee that the cost of sports rights would come down, a merger would reduce the number of bidders for such rights and allow a combined company to spread acquired content over more channels.

Fox could bolster its sports channel, Fox Sports One, by combining efforts with Time Warner’s TNT to recapture the rights to broadcast NBA basketball games when they expire in 2016. TNT also has rights to college basketball and professional golf, adding to Fox’s Major League Baseball and NASCAR racing.

“A combined portfolio of sports could better challenge ESPN,” DiClemente wrote in a research note.

Possible downsides

To blunt the rise of streaming services like Netflix and Amazon Instant Video, a combined company would have more power to withhold content or demand steeper licensing fees. That, in turn, could force streaming services to raise subscription prices.

And further consolidation puts more media voices under the control of one entity. That’s why Fox, which operates the lucrative Fox News Channel, is willing to sell Time Warner’s CNN, according to one person familiar with the matter. That person spoke on condition of anonymity because that deal point wasn’t officially made public.

It’s unclear how regulators would view so many pay TV channels being owned by the same company.

Not over yet

DiClemente and Janney analyst Tony Wible both believe that with interest rates low and with a healthy balance sheet, Fox could raise its bid above US$100 per share by borrowing more money. It also could set off interest by other bidders for Time Warner, which in turn could set off other mergers among content companies that don’t want to be left out.

“It’s a chain reaction,” Wible said. “There will be more consolidation on the content side.” Crockett agreed. “I think what this is, is ‘Game on’.”

— Herald with AP, Bloomberg


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