Why Fox Could Try To Buy Time Warner...Again

• The share price of Twenty-First Century Fox Inc FOXA has declined 22.07 percent year-to-date, from a high of $38.405 on December 31, 2014.
• Following the steep decline in Time Warner Inc TWX's share price, Brett Harriss of Gabelli & Company expects 21st Century Fox to re-bid for Time Warner.

Analyst Brett Harriss elaborated that 21st Century Fox had made an offer for Time Warner in June 2014, which consisted of $32.42 in cash and 1.531 shares of non-voting shares of the former company.

“Time Warner rejected the offer citing 1) expectations for standalone value creation at TWX, 2) risks surrounding the value of FOXA non-voting stock, and 3) governance risk in the Murdoch controlled company,” Harriss mentioned.

On October 14, 2014, Time Warner had announced its long-term EPS guidance for 2016 at $6 and for 2018 at $8. However, management reduced its 2016 EPS guidance to $5.25, which led to the stock declining from its highs in the $90s to $68 per share.

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According to the Gabelli & Company report, “The industrial logic is compelling; a combined Fox Warner would eclipse Walt Disney Co DIS as the dominant U.S. media network company.”

Harriss also believes that given that both companies operate similar businesses, the operating synergies would be significant. 21st Century Fox has estimated operating synergies worth $1 billion in 2014, which Harriss believes could prove conservative.

Going forward, as Pay-TV subscribers begin to decline, it would become increasingly important to negotiate leverage with MVPDs. Harriss, however, believes that Time Warner, on its own, would be at a disadvantage in such negotiations, in the absence of a broadcast network. 21st Century Fox can offer the leverage of its FOX broadcast network.

Similarly, a merger would lead to a combined sports rights portfolio that would be on par with that of ESPN. Harriss also believes that the merger “would create unique international scale.”

In addition, given that direct to consumer products are becoming increasingly important, “a combined company would be better positioned to build a wholly owned OTT product,” the report said, while adding that “regulatory issues could be managed.”