Word that Time Warner nixed 21st Century Fox’s $80 billion takeover offer spurred many Wall Street analysts and pundits to speculate that the media and entertainment biz is on the cusp of a crazy wave of consolidation.
Conventional wisdom is that there’s greater urgency for M&A among media congloms, to counter the significant heft that the pending combinations of Comcast-Time Warner Cable and AT&T-DirecTV would yield. And the Fox-Time Warner discussions represent the biggest merger talks between two large cap conglomerates in years.
But the factors that led Rupert Murdoch to covet Time Warner’s TV and film properties are uniquely mapped to the profiles of both companies — and may not spell a coming cascade of dealmaking in the sector.
“While we think Fox and potentially others will continue to look at (Time Warner) given its attractive portfolio of assets, we do not see a large wave of M&A activity on the horizon for the group,” Jefferies equity analyst John Janedis wrote in a note.
Fox’s proposed acquisition of Time Warner makes sense because the resulting entity would have greater scale across TV and film production as well as complementary international assets, according to Janedis. In addition, Time Warner would bring Fox additional Major League Baseball, NBA and NCAA basketball tournament rights, which Fox could use to gain leverage across its sports networks including Fox Sports 1.
“Ultimately, this offer is about greater global scale in TV and extracting cost savings on highly complementary businesses,” Morgan Stanley analyst Ben Swinburne said in a note.
Moreover, as evidenced by Time Warner’s characterization of the $80 billion overture as a lowball offer, media companies aren’t in desperate panic to pair up.
“(W)e do not believe that media companies necessarily need to consolidate in order to ‘reclaim’ balance of power from now-consolidating distributors such as AT&T/DTV and TWC/CMCSA,” according to Nomura analyst Anthony DiClemente.
On the other hand, while both Fox and Time Warner have significant scale and leverage individually, “this merger would create a cable TV network juggernaut,” DiClemente said. The combined company would be able to command affiliate rate increases from pay-TV providers of more than 10% “for the next 5 years for the pro forma entity, if not longer,” he said.
In other words: a very-nice-to-have, but not a have-to-have, proposition.
But some believe the Fox-Time Warner talks definitely signal more M&A activity. “Regardless of the outcome of this potential combination, we believe it will be tough to put the toothpaste back in the tube and sentiment-wise, the game of consolidation will now be afoot in the space,” RBC Capital Markets analyst David Bank said.
Many investors clearly anticipate upside from the development. The news of the aborted (for now) talks between Fox and Time Warner drove up most media-company stocks Wednesday — pushing Time Warner shares up 17%, to close at $83.13 per share. Fox, however, closed down 6% for the day, to $33 per share.
Meanwhile, Murdoch isn’t ready to give up his pursuit, according to the New York Times. In the coming months, 21st Century Fox may up its $85-per-share bid for Time Warner. (21st Century Fox said there are currently no discussions between the two.)
Aside from Fox, though, there aren’t many feasible M&A dance partners for Time Warner. The other most logical merger pairing for Time Warner is CBS, according to Bernstein Research senior analyst Todd Juenger. However, he noted, “control of CBS rests completely in the hands of Sumner Redstone, and TWX is bigger than CBS, so the deal dynamics would be quite different.”