Time Warner shares beat the broader market

Time Warner’s run at Dutch television giant Endemol, if a deal materializes, would be the first acquisition of more than $1 billion that the industry has seen since Disney acquired Marvel and Comcast set its pact to take over NBCUniversal back in 2009.

Media companies have spent the last three years using cash to buy back stock, getting vigorous applause from Wall Street. But despite a general aversion to media M&A, analysts and investors like a Time Warner-Endemol play and pushed the stock higher Monday. Time Warner shares beat the broader market, closing up 1.39% at $34.92.

“While investors tend to react negatively to M&A deals by media conglomerates, we think a potential Endemol acquisition could make strategic make strategic sense,” said David Bankof RBC Capital Markets. It would bolster Time Warner’s core TV production capabilities and give it a strong international infrastructure. It fits with Time Warner CEO Jeff Bewkes’ intense focus on content and willingness to invest in it, something he reiterated last week during the company’s conference call to discuss quarterly earnings.

At the price discussed, about $1.4 billion, a deal also makes financial sense, Bank and others said. An investor group led by John de Mol and including Italy’s Mediaset and Goldman Sachs paid some $3.5 billion to acquire Telefonica’s controlling stake in the “Big Brother” producer in 2007.

An agreement would be a landmark in a sector traumatized by a decade of frenzied deals.

The only hookups that have come remotely close in size have been News Corp.’s acquisition of Shine last spring for $643 million, and Scripps Networks buying Virgin’s stake in UKTV for about $550 million. That deal closed last month.

News Corp. was forced by the phone hacking scandal that erupted over the summer to abandon plans to acquire the rest of BSkyB for $12.5 billion. Instead, it announced a $5 billion share buyback.

Time Warner is in the middle of its own $5 billion repurchase. It acquired $3.7 billion worth of stock so far this year.

Viacom is working through a $4 billion buyback. CBS last week announced that it has doubled its planned $1.5 billion shares buyback.

Buybacks shrink the number of shares outstanding so it increases a company’s earnings per share, which is why investors love them. Companies tend to favor them when they think their shares are undervalued, they don’t know what to do with their cash and they want to make investors happy.

What’s key is that Bewkes appears to have earned Wall Street’s trust not to overpay.

Several weeks ago Time Warner passed on Poland’s TVN. Vivendi’s Canal Plus is now in exclusive negotiations to acquire the television operator. “What’s noteworthy is what didn’t happen,” noted one analyst. “The price got too high.”

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