Jeff Bewkes’s Time Warner Inc. (TWX) and Rupert Murdoch’s 21st Century Fox Inc. report earnings tomorrow, and investors are likely to push for more clarity on their competing visions: go it alone or merge.
Murdoch’s $85-a-share bid to buy Time Warner Inc. was rejected by Chairman and Chief Executive Officer Bewkes and his board, who said their own growth plan will create more value than any proposal Fox “is in a position to offer.”
Bewkes will need to elaborate on those plans if he wants to win over shareholders who are anticipating a sweetened proposal. Time Warner shares have surged 20 percent to $85.53 since the rejected bid was announced July 16. Fox’s Class A shares have dropped 10 percent to $31.52.
While executives from both companies will no doubt stick to their talking points when discussing the $75 billion offer, here are a few questions they’ll have to answer eventually, if not tomorrow.
Five questions for Time Warner:
1. Can cable-network ratings come back? TNT and TBS are in a slump, with the prime-time audience in the prized 18-to-49 age group down 17 percent and 6.3 percent, respectively, this season, according to Nielsen data. The ratings would suffer even more if Time Warner can’t renew the rights to air NBA games. That would make it harder to reach a company forecast, reiterated in May, to increase by 10 percent annually the fees collected from pay-TV carriers that offer the networks. Bewkes should explain how he’ll do a better job reversing the slide than Murdoch.
2. How can HBO expand its audience? The home of “Game of Thrones” and “True Detective” is sold as part of a more expensive package of channels by pay-TV services, a marketing strategy makes it harder to increase HBO’s subscribers. Bewkes has said Time Warner can create more value independently than as part of Fox. He needs to explain how he can capture more customers at a time when cheaper options like Netflix Inc. are gaining viewers, and the network’s international strategy.
3. What’s Time Warner worth? Prior to the announcement of Murdoch’s offer, the highest projection for Time Warner shares within the next 12 months was about $80, according to analysts’ estimates compiled by Bloomberg. Bewkes and his board determined Time Warner is worth more than the $85 a share Murdoch has offered. As a standalone company, investors want to know how the company can really be worth more.
4. With nothing left to spin off, what’s the growth plan? Time Warner has become more attractive as a takeover target after spinning off the cable, Internet and publishing properties, leaving the company focused on cable networks and the production of movies and TV shows. Analysts have suggested Bewkes has been positioning the company for a sale all along. With nothing left to spin off, he should show how he can keep on boosting the stock over the long term, and how that’s better than a union with Fox now.
5. Got alternatives? Even though Bewkes rejected Murdoch’s offer, there’s speculation that the Time Warner eventually will need to tie up with another company. If not Murdoch, Bewkes needs to show who might be a better merger partner -- whether it’s CBS Corp., Discovery Communications Inc., or another company -- and why.
Five questions for Fox:
1. How much can Murdoch pay? Time Warner has suggested Murdoch can’t afford to raise his offer high enough to win a deal, without jeopardizing Fox’s credit rating. Murdoch hasn’t made clear to lenders and his own shareholders how he plans to surmount the financing hurdles of a higher bid without stretching too far.
2. Can Fox prevail in a long game? The clock could become an enemy for Murdoch, who stalked Dow Jones & Co. for the better part of a year. Time Warner is a much bigger target, and its refusal to negotiate means Fox may need to decide whether to launch a proxy battle that could extend well into next year. The risk is that Time Warner becomes a distraction to Fox. Murdoch’s bid could founder on anything from price to an unwillingness to offer voting shares.
3. Will regulators approve? Regulators are mindful of the cable-TV consolidation that’s already affecting the media industry, and are sure to look closely at Fox-Time Warner. While Fox, owner of Fox News, has said it would sell CNN, a merger of two major movie and television studios would also attract scrutiny. Investors want to know if selling one of the studios is an option -- or closing one down, especially since the Fox lot in the Century City neighborhood of Los Angeles would be attractive to developers.
4. Is this the last big deal? Murdoch, now 83, has built Fox over decades and wants to leave the global media company in the hands of his children to run. Investors want to know whether securing Time Warner would essentially complete the Fox he envisions or if he would like to do other major transactions.
5. What’s the plan with BSkyB? Fox has said before it wants to sell stakes in media operations it doesn’t control, or buy full control. The biggest remaining asset that fits this description is British Sky Broadcasting Group Plc, in which Fox holds a 39 percent stake. Once Time Warner is resolved, investors want to know whether Murdoch is a buyer or a seller of BSkyB, and whether the outcome of his current pursuit will have an impact on that decision.