Fox-Time Warner deal would form media colossus

So it starts with a bang.

The much-anticipated wave of media mergers stormed in Wednesday with news that Rupert Murdoch's 21st Century Fox had offered to pay $75 billion or more to take over Time Warner. If consummated, the deal would irrevocably alter the media and entertainment worlds, ranging from Hollywood movie distribution and television retransmission fee fights to cable news wars and how Americans watch football and baseball. So much for waiting to see whether smaller networks will combine first, as had been rumored.

Time Warner, which received the proposal last month, rebuffed the initial overture, with its board stating that the company may be better off going it alone. But Murdoch always has been relentless in his pursuit of assets he covets, and he may be looking for one last megadeal. And rarely do transactions of this magnitude fail after the first offer; the two companies will likely continue to talk even as other media companies may jump in with their own bids.

"Fox is Murdoch. Murdoch is 83 years old, and I think he wants this as his grand final chapter of his career," said Phil Swann, president of TVPredictions.com.

But if Fox and Time Warner come together — and if regulators approve the merger (no sure thing) — the combined mega-entertainment colossus would own two huge Hollywood movie studios, 28 local TV stations, the most watched cable news network in Fox News along with its closest rival CNN, as well as popular cable channels HBO, TNT and TBS.

With Fox offering about $84 a share in cash and stock, it would be the largest media merger since the debacle that resulted after AOL bought Time Warner for $162 billion in 2000. Shares of Time Warner soared 17% to $83.13 Wednesday after The New York Times broke the story.

COMPLEX MANEUVERING AHEAD

Time Warner laid out its reluctance to do the deal point by point in a statement Wednesday. In a video, Time Warner Chairman and CEO Jeff Bewkes said the board determined that the unsolicited bid "was not in the best interests of Time Warner."

Murdoch likely sees Wednesday's rejection only as a starting point. "We believe (21st Century Fox) will not go away and ultimately they will raise their bid to try to get the deal done," said Michael Nathanson, an analyst at MoffettNathanson, on his blog. "Time Warner is perhaps the last pure play, non-family-owned media company of scale outside of Disney."

But sweetening the pot for Time Warner Chairman and CEO Bewkes could be tricky for Murdoch, who offered a combination of 1.531 non-voting common stock shares and $32.42 in cash.

The Murdoch family controls Fox through 39.4% of the voting rights in a separate class of shares. And Time Warner is not keen on receiving non-voting shares to complete the deal, which could drive Murdoch to alter the bid structure. "There is significant risk and uncertainty as to the valuation of 21st Century Fox's non-voting stock and 21st Century Fox's ability to govern and manage a combination of the size and scale" of the combined company, Time Warner said.

Still, the pressure to strike a deal will not be insignificant for Bewkes, as the two companies have a sizable overlap of institutional investors. A majority of Time Warner shareholders also own shares in 21st Century Fox.

BOLSTERING BARGAINING POWER

Murdoch's interest in sizing up comes amid a flurry of mergers by pay-TV providers, whose profit margins have been hampered by higher fees they pay to cable networks for content and a growing base of cord-cutting consumers seeking better value in video via online streaming.

A merged Fox-Time Warner would truly wield superpower at the bargaining table, whether negotiating fees for its own programs or acquiring content to broadcast or distribute.

Earlier this year, Comcast agreed to pay $45 billion to buy Time Warner Cable — a former unit of Time Warner that had been spun off as a separate company — to combine the nation's two largest cable companies. AT&T also struck a $48.5 billion deal in May to buy DirecTV. Regulators are reviewing the deals.

"The idea of consolidation should come as no surprise," Nathanson said. "When one side of the bargaining table gets bigger, the other side usually reacts."

Sports content in particular is becoming more expensive to produce and acquire. Fox, and Time Warner have paid billions for the rights to air the live games of all major sports leagues.

Fox, which already has a content library flush with everything from Avatar to the X-Men, would become the curator of Warner's catalog, which runs from Game of Thrones to Superman.

Time Warner also has a coveted asset in HBO, whose original shows are beloved by critics and fans but are expensive to produce.

Combining resources would also theoretically generate more savings by eliminating duplicated functions. To get regulatory approval of any deal with Time Warner — or with any other large network — 21st Century Fox will likely have to shed some assets. If the deal were to be completed, the merged company likely will sell CNN to appease regulators, according to a report by Bloomberg News

What the deal is all about, Swann says, is "to create more leverage and power when you are bargaining for retransmission or for rights to a movie. With that kind of content and that kind of reach, you are going to get the best deal."