Fox and Time Warner: what was it?

The generous offer made by Fox became the first step for Rupert Murdoch, a media executive famous for his deliberate way of pursuing companies he wants to put under his belt, in building the largest vertically integrated media company. But what would Time Warner bring to Mr. Murdoch should this deal finally come through?

First of all, let’s think about the challenges and problems Fox is currently facing. To do that, we need to depict the whole production cycle of bringing a new show to life. The interests of Fox are much broader, but they complement the major product.

Development→Pre-production→Production→Post-Production→Distribution and delivery→Programming and scheduling on-site

Twenty First Century Fox is extremely strong in elements such as Pre-production, Production and Post-Production (which is obvious given they are one of the most successful Hollywood studios). On the other hand, HBO has built the reputation of a solid powerhouse that knows how to turn things around and has made blockbusters out of every screenplay the company has decided to pursue. The most successful franchises revolutionized the way modern people perceive TV by making it fancy and genteel again. Having this asset in their hands, Twenty First Century Fox would turn into a vertical conglomerate that would be able to offer major providers a solid number of potential blockbusters.

But other side of the spectrum (delivery) is also somehow troubled. In addition to emerged players – Comcast, Dish – that require better and better financial terms, Netflix, Google and Amazon (historically they played a role of pipelines) are becoming more interested in investing in TV production. And what they already have is the obsession of the younger generation as well as ready-to-use delivery channels that can stream the content not only on prehistoric TV sets but also on iPhones and iPads. To battle with these competitors, Fox is in need of leverage that might come along with the vertical integration.

That said, I see these goals in the deal:

• Better economies of scale will help to negotiate preferred terms with cable providers and with the Producers Guild of America.

• Cost savings from streamlined processes and layoffs. In recent years, the majority of big production firms were concerned with day-to-day expenditures and inefficiencies. Supposedly, the combination of different approaches should give rise to a new conglomerate that learns from the mistakes of others.

• Access to sports assets of Turner Broadcasting. It owns rights for NCAA, March Madness, PGA, NBA and NFL games. Fox Sports was trying to compete with ESPN, an unquestioned leader in the segment. Usually, sports rights are sold in advance, and channels fiercely compete with each other. Turner has good relations with NBA dating back to 1984, and is expected to bid for a [new deal that will allow to air games until 2021](online.wsj.com/articles/nba-seeks-to-double-rights-fees-from-disney-time-warner-1405387769).
A recent survey made by Harris Interactive shows that live games keep customers loyal and is possibly a reason why they refrain from cord cutting, one of the most critical problems that will need to be mitigated as soon as possible.

• This merger can be considered a warning to Amazon and Netflix: don’t intrude into our territory. I don’t think that these companies will follow the advice, but showing muscles is one of the most ancient war tactics. Alternatively, Google has enough cash on hand to outbid virtually any proposal either by Fox or any other firm. However, I don’t see any reasons why the Mountain View giant will do this in the short-term unless it will be put in an awkward “have-to-respond” position.

The problems that the merger will face:

It is still unclear whether antitrust regulators will allow the deal. One of the most recognizable assets, CNN, is expected to be put on the auction: the government will never allow having two major channels, Fox and CNN, under one roof. Among potential bidders such companies as ABC Network, CBS and even Yahoo are mentioned. Analysts predict that the channel can go for as much as $10 billion in a sale.

The notion of a fair price is another question. Murdoch is famous for paying hefty premiums if he wants to pursue a deal. It is not in question that he will readily increase the sum he is willing to pay. And he will have to, because some authors suggest that Time Warner realizes that the current state of the market is not ideal for transactions like this: very few companies are able to make a counter offer. In this case, Time Warner will choose to wait and drive the acquisition price even higher. Additionally, Fox is expecting to pay 60% of the purchasing price with its own stock. Surprisingly, this announcement moved the stock price down. It makes the financial part of the deal even more intricate. In any case, Rupert Murdoch will overpay. Cost efficiencies of $1bn from consolidating back-office operations are expected but not guaranteed.

Another fear I cannot get rid of is that the deal will trigger a snowball effect: other majors will rush to make acquisitions, sending shockwaves through the whole industry. Google, Facebook and Amazon were already mentioned above: and these are just some examples of companies sitting on piles of cash. They are not technically ready to engage into new business, but the whole environment prompts them to do it.

Lastly, I need to mention Mr. Murdoch’s personality. He is a man who “enjoys competing.”. It might be one of the last deals the aging mogul is administering, and he wants to conclude it on a high note (read – make an acquisition) no matter what it takes. It won’t make the decisions more balanced to plunge his financial advisors into a few months of sleepless nights.
It is obvious that we will see a new wave of industry restructuring. The legacy players that are still out there are too desperate to conserve their power, and they will take on risk in future and go ahead with acquisitions – even if these don’t make sense at first sight.

Update:
As I said, 21st Century Fox won’t give up. It sells its German and Italian business units to, supposedly, get money and pull into the Time Warner deal.

 
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