Top Analyst on Time Warner-Fox Merger: 'We Don't Buy the Rationale for This' (Guest Column)
Fix Fox ratings, and don't overpay for a studio with overlapping "dis-synergies," writes Cowen and Company media expert Doug Creutz of Rupert Murdoch's $80 billion bid for TW.
This story first appeared in the Aug. 1 issue of The Hollywood Reporter magazine.
When news broke July 16 that 21st Century Fox had made an $80 billion bid for Time Warner, my colleagues and I cringed. The Big Media companies have worked hard over the past five years to shake the appearance that they are more interested in pure scale than stock performance. For a long time, they were (justifiably) seen as serial destroyers of value based on bad deals like Time Warner-AOL and News Corp-Dow Jones. But this has changed recently with a slowdown in M&A activity and an increase in capital returned to shareholders through dividends and share buybacks. Now Fox’s attempted takeover could touch off another round of aggressive M&A in the media sector, which would likely act as an anchor on share prices because the Big Media companies would more likely act as consolidators rather than accept being targets.
There are many risks to the Fox bid for Time Warner. The first is regulatory; the public outcry against further media consolidation likely would be significant. Second, there are risks to the deal structure. Fox’s bid has a significant share component; Fox’s Class A shares declined 7 percent in the three days after the bid was announced. If Fox were to raise its bid, shares could decline more, potentially creating a situation where the actual value of any bid comes in well short of the theoretical value (see Comcast’s aborted 2004 bid for Disney for an example of this in action). Third, there are huge integration risks to any combination. Fox and Time Warner both already are enormous organizations, with different cultures. We believe that at a certain point there are actually dis-synergies to scale, as businesses become too unwieldy to run effectively.
We generally do not buy the rationale for why this merger would generate significant value. For instance, the merger of two large studio businesses would not necessarily enhance profitability when both already are significantly profitable. There would likely be a diminution of output, which would benefit rivals much more than the new combined entity. And there are not any significant benefits from combining the two companies’ sports assets. Both companies’ networks are priced based on the sports they currently carry; a merged company has the same number of networks and the same amount of sports as the two do separately, and we do not believe the cable and satellite operators would suddenly pay more money for the same networks carrying the same content just because the operations were merged.
Finally, we do not buy the argument that content consolidation is necessary due to distributor consolidation. Fox and Time Warner separately both already have a critical mass of must-own content that gives them the upper hand in any negotiation. Big Media currently has a perfect record of being able to negotiate higher rates for content and that likely will not end anytime soon.
We would prefer to see Fox focused internally on the following pressing issues: (1) halting the ratings tailspin at the Fox broadcast network; (2) growing the market share of new and rebranded domestic cable channels, such as Fox Business, Fox Sports 1 and 2, and FXX; (3) ensuring that the significant investments that the company is making in international cable assets pay off; (4) Coming to a clear decision about the future of its fully and partially owned European Sky satellite assets; and (5) proving that it can hit the $9 billion EBITDA target for fiscal 2016 that it laid out for investors last August, without resorting to a huge M&A transaction to muddy the waters. These issues are more than enough to consume management’s attention, and the distraction of an attempted takeover of Time Warner necessarily means less focus on the home front.