"Rupert Murdoch moves more swiftly than most rivals, takes bigger risks, and never gives up." The same year that was written about him, in 1995, he ordered his bankers and lawyers to examine a takeover attempt of Time Warner, then valued at $40 billion pre-AOL fiasco. Murdoch didn’t like that Time Warner was joining with Turner Broadcasting because it blocked some of his expansionist plans. Now it’s deja vu all over again. Hollywood woke up today to big news about the first-in-a-while possible Big Media mega-merger. The New York Times first reported, subsequently confirmed by both sides, that Murdoch offered $80 billion to purchase Time Warner for his 21st Century Fox. The price, $85/share in a combination of non-voting stock and cash, was too low for Time Warner’s Jeff Bewkes and his board to accept on the spot so they politely declined. That’s now prompted speculation that Murdoch can and might pay over $100/share and won’t stop until Time Warner is his.
Such media consolidations shocked us in the nineties and the naughts but now they elicit little more than a shrug. The only surprise is that this deal didn’t involve Google or Apple or Amazon but instead two large cap content conglomerates. Already talking heads on Wall Street are nodding approvingly of Murdoch’s offer for Time Warner while they discussed when Time Warner would be bought, not if, and what other content companies might be in play. That list now includes Discovery, AMC, Scripps Network, even the studios Viacom/Paramount/CBS and Sony and Lionsgate and Starz. Almost every media company’s stock price except Murdoch’s jumped on the news.
What wasn’t discussed is how media consolidations like this hurt Hollywood and its content providers. Because it stinks. In sum, the Street sees scale as only helping the ‘Content Is King’ theory. But the people who actually provide that content are peons who become prisoners of these deals.
For the past 25 years I’ve written story after story warning about the downsides of Big Media mergers. But it’s been like pissing in the wind. Neither the FCC nor the FTC nor the DOJ no matter who’s been in the White House have stopped them because of anti-trust or anti-access concerns. Put 21st Century Fox and Time Warner together, and they make up 25%-to-30% of the market share for movies being made. The Fox and Warner Brothers TV studios are the #1 and #2 film and TV studios in the entire industry. Merging their significant distribution infrastructures — for international box office, home video distribution, and/or digital distribution — would create both revenue and cost synergies for their outsized businesses. That’s good for the companies. Merge their movie and TV production studios who are now bitter rivals looking to sign the best talent, and suddenly directors and writers and actors and showrunners can’t play off the two companies against each other for bigger deals. That’s bad for you.
Combine their international cable footprints and its uber-huge with Fox revenue 44% of total and strong in Europe while TW 36% and well penetrated in Latin America. Murdoch’s resultant international cable scale would create synergies on ad sales, affiliate fees, and pay-TV penetration, according to the analysts. That’s good for the companies.
What this also means is that, just as a time when a wealth of new buyers like Goggle, Hulu, Amazon, YouTube, Yahoo and Netflix for scripted professional TV programming have appeared, it’s entirely possibly that 2 of the biggest traditional buyers will become one combined entity to better control over how content is sold to these new online players. That’s bad for you. A merged Fox/Time Warner company would negotiate digital rights more effectively and create an even more formidable rival to these still fledgling programmers and distributors. That’s good for the companies.
Today media analysts couldn’t wait to explain that Murdoch needs the more clout that Time Warner could provide to press for more favorable terms from the cable and telecommunications industries. True, those octopus arms are only getting longer with their own pending mergers of Comcast/Time Warner Cable and AT&T/DirecTV. So having more cable networks would give traditional Big Media more negotiating leverage with these mega-distributors so they can receive dual revenue streams from advertising as well as retransmission fees, not to mention take "billions of dollars of synergies". Investment bankers are putting pressure on media companies to consider mergers and partnerships to gain scale to push back. Of course, Wall Street wants more Big Media consolidation in order to pocket big bucks fees from the deals.
Take Goldman Sachs, which is handling Murdoch’s takeover offer. It just beat profit expectations last quarter because revenues from investment banking were up 15% (outweighing a 10% drop in its traditional powerhouse of trading bonds, currencies and commodities). And Goldman already has set aside nearly $4B out of the quarter’ revenues to pay annual bonuses for its top executives at the end of 2014.
The rich get richer. Goldman Sachs doesn’t care what happens to 21st Century Fox or Time Warner employees when the redundancy studies are made and the job layoffs are started. Goldman Sachs also won’t be around when the next billions of dollars of a goodwill writedown takes place after another recession hits and neither corporation will be worth what it is now at the top of the stock market. (Only Time, spun off by Time Warner, noted that Murdoch has a track record of making bids that all coincide with market peaks. Shortly after he makes these deals, stocks go splat.)
For Time Warner, the price may simply still be too low, even with a 20% control premium, and the non-voting stock offer unacceptable. (The separate voting stock is how Murdoch and his family keep control.) That prompted analysts today to speculate that Time Warner may require a much higher percentage of cash, if not all cash, from Murdoch. Meanwhile, sounding quite arrogant, Time Warner is saying in response that its existing business plan is superior to any proposal no matter how “determined” Murdoch is to buy TWX. Chairman Jeff Bewkes even sent a short recorded video of himself to his employees today explaining why Murdoch’s offer was rebuffed.
But could this offer, or any offer, have been avoided by Time Warner? Of course. By stripping away asset after asset – first AOL, then Time Warner Cable, finally Time Inc, the once biggest global media conglomerate is now just Warner Bros, HBO and the Turner Networks. That, in turn, made Time Warner more attractive but also more vulnerable as a takeover target.
And why wasn’t chairman Jeff Bewkes using the resulting cash from the cable sale to acquire what even Gordy Crawford had said were rare buying opportunities in its core entertainment arena? So while Disney’s Bob Iger was buying Pixar and Marvel and LucasFilm to build Mouse House value, Bewkes was sitting on his hands during the recent recession. There were repeated stock buybacks, a move which I consider to be the corporate equivalent of burning dollar bills.
Bewkes also has resisted repeated calls to spin off extremely lucrative HBO. "The inherent value of HBO’s business probably exceeds the 8x-10x EV/ EBITDA multiples ascribed to HBO by the Street in TWX’s sum-of-the-parts models (especially if you index HBO to Netflix valuations)," wrote Nomura media analysts Anthony DiClemente and Benjamin Black about the proposed merger today. "And even on a standalone basis, HBO is a desirable asset that is well positioned for a digital media future."
Oh, and let’s not forget the platinum parachute which Bewkes’ compensation contract will call for if Time Warner gets bought and/or he gets canned.
Murdoch has always had an unquenchable appetite for acquiring companies and growing bigger. It led his News Corp to the precipice of bankruptcy in 1990. But that was then and this is now. So he’ll be seen as an acquirer in one way or another even if Time Warner becomes out of reach. But Murdoch knows this offer gives him scale in sports and cable networks to bolster the negotiating power of a content provider like his vis a vis Fox News, F/X, and the Fox regional sports networks alongside TNT, TBS, and others. (One analyst sees 10+% affiliate rate increases assured for the next 5 years.) Sports rights ownership of Time Warner would help with launches of Fox Sports cable networks along with Turner’s rights to NBA, NCAA basketball, and the PGA on Fox Sports 1 (FS1), which itself has strengths in other sports including MLB, NASCAR, and USGA. A combined portfolio of sports could better challenge ESPN and keep NBC’s growing sports coverage at bay.
Back in 1983, some 90% of the U.S. media was controlled by 50 companies. I thought Hollywood had it bad enough when studios started gobbling up networks, and cable companies started taking over studios and networks. Now 90% of media is controlled by 5 companies – Comcast, Viacom, CBS, Walt Disney, Time Warner and 21st Century Fox. The Nation used to complain about "The National Entertainment State" and the journalistic, political and cultural questions raised by the ongoing concentration of media power in so few hands. Nowadays, journalism doesn’t matter because it’s barely in existence. Note how quickly Murdoch said he would toss aside CNN. (No journalism on that so-called cable news channel anymore: just watered-down partisan political polemics, reruns of Anthony Bourdain’s Parts Unknowns, and endless searches for that missing Malaysian plane.) I now see where Big Media will soon consist of Disney and Comcast and 21st Century Fox. Analysts today called Murdoch’s Time Warner offer "basically the first salvo in a wave of media consolidation." You’re fucked.