Time Warner CEO’s Independence Pitch Faces Murdoch Record

Jeff Bewkes says Time Warner Inc. is better off without Rupert Murdoch, who proposes to buy the entertainment giant for more than $75 billion.

He has this much going for him: Even before a stock-price surge this week, the company had produced a 114 percent return for investors since he took over as chief executive officer in 2008, more than Murdoch’s 21st Century Fox Inc.’s 90 percent.

Bewkes, 62, outpaced his rival by showering shareholders with dividend payments and producing more value through spinoffs, including Time Warner Cable Inc., AOL Inc. and most recently Time Inc. Even with that track record, he’ll have to persuade investors that his ability to expand sales outweighs the cost savings and greater scale they could get through a merger with Murdoch’s media powerhouse.

Murdoch, 83, can argue to investors that he’s certainly been no slouch. Fox’s return over the period from 2008 to July 15, the day its unsolicited offer was revealed, was also boosted by dividend payments, as well as the value of News Corp., the publishing business Murdoch splintered off last year. Both Time Warner and Fox have outdone the S&P 500 Index, which has only increased 36 percent in that time.

“They’re both terrific,” Mario Gabelli, chairman of Gamco Investors Inc., said in an interview. His investment firm owns shares in both companies.

Cool Executive

“Bewkes is the gift that keeps on giving,” he added, “and Murdoch is a global guy who has an appetite for these things -- they’ve both been great for us.”

Shareholders may end up choosing between two men who have both shown an ability to create value while reshaping their companies. Bewkes, a cool, no-nonsense executive whose gravelly voice and wry sense of humor have often endeared him to the company’s investors as well as his competitors, has revitalized Time Warner by slimming down the bloated business into a pure video entertainment company.

Past performance is one thing. The future growth of both companies will be an even bigger issue for investors, and that’s where Bewkes faces a challenge in persuading shareholders to let him keep flying solo.

Time Warner is projected to lift its annual sales by 17 percent in five years, based on an average estimate of analysts compiled by Bloomberg. That’s far behind Fox, which is projected to increase sales by 53 percent in that same period.

While Bewkes’s efforts to whittle down the company to its most prized assets has increased the value of the business, it’s also potentially made it harder for him to increase revenue at a more rapid clip than some of his competitors. There’s nothing left to spin off.

Sports Programming

Underlying analysts’ projections for faster growth at Fox is Murdoch’s addition of a potentially lucrative new sports channel, Fox Sports 1, which was built to compete with Walt Disney Co.’s ESPN. Adding more cable networks is giving Murdoch the opportunity to get more in licensing fees from cable and satellite operators.

Time Warner’s collection of cable networks, including TNT and TBS, have struggled to retain viewers. TNT’s ratings have dropped 16 percent since 2011, while TBS is down 13 percent, according to Nielsen data. On the plus side, the company’s subscription network, HBO, continues to expand.

Bewkes’s growth strategy rests on negotiating healthy increases for the licensing fees that cable and satellite companies pay to carry Time Warner’s sought-after shows, such as “Game of Thrones” on HBO and the sports programming that are ratings gold mines for the Turner networks.

Whittling Down

A year after Bewkes became CEO in 2008, he cleaved off Time Warner Cable Inc. and finally decoupled AOL Inc., part of a disastrous 2001 merger undertaken by his predecessors that Bewkes once called “the biggest mistake in corporate history.” This year, he spun off magazine publisher Time Inc., leaving him with the valuable cable networks as well as the Warner Bros. film studio.

Bewkes appeared in a rare public video this week to tell shareholders that Time Warner’s current path is “superior to any proposal that Fox is prepared to offer.” While Time Warner’s board rejected the bid, Murdoch is open to increasing his offer if Bewkes’s company is willing to enter talks, according to several people briefed on the matter who asked not to be named because the strategy is to remain private.

Fox calculates the combined company could achieve more than $1 billion in cost savings, including through the elimination of overlapping back office, human resources, sales and information technology operations, people familiar with the matter said. Fox estimates that figure could go higher once it’s able to conduct due diligence on Time Warner, the people said.

Murdoch bowed to investor pressure and split his company in two last year, with Fox owning the far more valuable entertainment assets, and News Corp. controlling the more challenged publishing businesses, including the Wall Street Journal and the New York Post.

Doubling Stocks

Both stocks have almost doubled in the past two years, with Time Warner surging 93 percent through July 15, when Murdoch’s unsolicited offer was revealed. Fox gained 82 percent in the period.

Merging Time Warner and Fox would add 12 percent to the combined companies’ shares next year, Craig Moffett, founder of MoffettNathanson LLC, estimated. That was based on the $1 billion in cost savings that Murdoch’s executives have projected. The share gain could go higher by as much as 17 percent if Murdoch kicks in more cash to the deal by selling his European satellite investments, Sky Italia and Sky Deutschland, to British Sky Broadcasting Group Plc, Moffett said.

Dividend Considerations

Stock price isn’t the only consideration for shareholders, who will also weigh elements such as dividends and corporate governance if eventually asked to decide the fate of Time Warner.

Murdoch effectively controls Fox through a secondary share class that has voting rights and in which he owns 38 percent. Such family control over a public company is common among media firms, such as Viacom Inc. and CBS Corp., both controlled by Sumner Redstone. Time Warner, however, has no family ties, and its shareholders are accustomed to owning one class of stock that has voting rights more typical of public companies.

“Time Warner has unique and powerful brands and leading businesses that are the envy of our competitors, so it’s not surprising we might attract attention from others,” Bewkes said in this week’s video. “Continuing to execute our strategic plan and our business plans will create significantly more value for the company and our shareholders.”

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