Is Fox Stockpiling Cash for a New Bid on Time Warner?

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James and Rupert Murdoch

A $9 billion deal with BSkyB could give Rupert Murdoch the extra cash he needs to close the deal.

This story first appeared in the Aug. 8 issue of The Hollywood Reporter magazine.

Is Rupert Murdoch sacrificing his European pay TV kingdom for a chance to seize the Time Warner empire?

On July 25, Murdoch's 21st Century Fox unveiled a deal, valued at more than $9 billion, to sell off its German and Italian pay TV assets to Britain's BSkyB. Fox will retain its 39 percent stake in BSkyB.

The pact will net Fox about $7.2 billion in cash after taxes, money that most analysts expect Murdoch to use to up his bid for Time Warner after his initial $80 billion cash-and-stock offer was rejected as too low.

Characterizing the European pay TV sale as "sacrificing pawns," Nomura analyst Anthony DiClemente says it will let Fox sweeten the deal. "Proceeds could be used to increase the bid price and cash percentage being offered," he notes, suggesting Fox could offer $95 a share for Time Warner, up from its initial bid of roughly $85, and finance 55 percent, up from 40 percent.

This would allow Fox "to boost its offer to purchase Time Warner without having to raise larger amounts of debt," adds Moody's analyst Neil Begley, noting that the Euro deal would result in cash on hand of "$12.7 billion plus roughly $6 billion to $7 billion of net proceeds from potential asset sales" like CNN, which Fox has signaled it would sell.

Some analysts see $100 a share as the mark that would persuade Time Warner CEO Jeff Bewkes to seal a deal, but Begley believes Fox might have to go beyond that, up to $105. And Bloomberg reported July 25 that Fox is willing to offer Time Warner shareholders seats on its board as a lure.

To fund a deal, some observers, including analysts at Credit Suisse, have suggested Murdoch could raise more cash by selling off or reducing his stake in BSkyB, valued at $9.5 billion to $10 billion. Murdoch might not be ready to part with it, though. Fox president and COO Chase Carey and co-COO James Murdoch are eager to get their hands on Time Warner's original content -- particularly shows produced by HBO -- but Sanford C. Bernstein analyst Claudio Aspesi believes the company wants to keep its options open by retaining a foothold in European distribution as well.

"Right now, content is key, but there are ebbs and flows," he explains. If distribution businesses are seen gaining leverage, "it would be a pity to have divested Sky Europe."

And if the Time Warner bid ultimately fails, the enlarged Sky Europe, as some have dubbed it, will have the reach -- and financial clout -- to produce HBO-style series of its own. It will have a combined annual program budget of nearly $8 billion and revenue of about $20 billion, more than 50 percent greater than BSkyB alone.

The three European platforms already had begun to develop their first three-way co-production before the deal: a 10-part superhero series called Diabolik