Time Warner Deal Anxiety Spreads as Bearish Options Climb

Concern is rising in the options market that something will derail Rupert Murdoch’s plans for Time Warner Inc.

Traders are buying up protection against a potential drop in Time Warner stock, wary of risks including the board’s resistance to a merger and potential antitrust issues. Options that would pay off should the stock fall back to where it was before the bid are priced at the highest in two years relative to bullish contracts, data compiled by Bloomberg show.

Time Warner surged 17 percent, the most in 14 years, on July 16, the day 21st Century Fox Inc.’s offer was first publicized. Murdoch’s cash-and-stock offer, which Time Warner rejected, was valued at $82.82 a share as of yesterday’s close. Sterne Agee & Leach Inc.’s Alex Panagiotidis said the options reflect uncertainty about whether Murdoch can claim his prize.

“Investors think the deal won’t go through easily,” said Panagiotidis, managing director for equity derivatives at Sterne Agee & Leach in New York, citing options trading. There may be concern about price or regulatory risk, he said, adding that he isn’t an expert on the company. The price relationship between puts and calls “went up a lot because the stock popped on the bid, but there is still a lot of uncertainty about if/what price a deal could happen,” he said.

‘Considerable’ Risks

Time Warner said it’s better off without Rupert Murdoch and that a merger would face “considerable strategic, operational, and regulatory risks,” according to a statement on July 16.

Convinced the media company was worth at least $100 a share based on future earnings, Time Warner’s board decided it won’t begin talks at much less than that number, according to people familiar with the matter who asked not to be identified because the deliberations were private. The board said its own growth plan “is superior to any proposal that 21st Century Fox is in a position to offer.” Fox isn’t currently planning to bid more than $90 to $95 a share, according to a person familiar with Fox’s position.

After evaluating Fox’s books, Time Warner concluded that to finance a $100-a-share deal, Fox would require so much borrowing that it could jeopardize its credit rating or use so much stock that existing investors’ holdings could diminish in value, the person said.

European Deal

Murdoch has confirmed that he will sell Fox’s pay-TV businesses in Italy and Germany to British Sky Broadcasting Group Plc, valued at more than $9 billion. The sale will allow Fox to stretch its takeover bid for Time Warner.

Keith Cocozza, a spokesman for Time Warner, declined to comment on the company’s options trading. Nathaniel Brown, a spokesman for Fox, also declined to comment.

The transaction that Time Warner rejected, which included 1.531 Fox non-voting shares and $32.42 in cash, would double Murdoch’s control over what consumers see on TV. Time Warner’s collection of cable networks, such as HBO and TNT, would be brought under the purview of Fox, the owner of channels such as Fox News and FX. Fox would sell news network CNN to appease antitrust regulators as it already controls Fox News, according to a person with knowledge of the matter.

Time Warner’s board has taken steps to hinder approval of a deal by removing a provision in its bylaws that allowed shareholders to call special meetings. The amendment would delay any action by shareholders to force a vote until June, when the company usually holds its annual meeting. The board approved it unanimously.

Puts, Calls

Puts protecting against a 10 percent decline in Time Warner stock cost 7.75 points more than calls betting on a 10 percent increase, data compiled by Bloomberg on three-month contracts show. The gap reached 8.98 points on July 22, the widest since June 2012, the data show.

Murdoch’s bid may prove hard to resist. A deal would be beneficial for shareholders, Ken Griffin, founder of hedge-fund firm Citadel LLC, said at a conference in New York on July 16. Mario Gabelli, chief executive officer of Gamco Investors Inc., called it “hard for a board to turn down” in an interview with Bloomberg Television July 16. Both own Time Warner shares.

The companies will probably agree to a deal if the price is right, according to RBC Capital Markets LLC’s David Bank.

“They will both play, it all just depends on how different they think the ballpark will be,” Bank, a media analyst at RBC, said by phone. “The board ultimately has to do the right thing for the company and its shareholders.”

VIX Index

The Chicago Board Options Exchange Volatility Index, the gauge of Standard & Poor’s 500 Index options prices known as the VIX, rose 3.5 percent to 12.25 at 9:35 a.m. in New York today.

After a surge in call volume on July 16, bearish options were the most traded yesterday. Puts hedging against a 4.8 percent drop to $80 in the next three weeks changed hands the most, data compiled by Bloomberg show. The stock has fallen 3.8 percent from its almost 13-year high on July 21.

“Time Warner’s amendment to the bylaw is a classic dissentive move,” Brett Harriss, an analyst at Gabelli & Co. in Rye, New York, said by phone. “It shows the board is serious about saying no and seems solely based on who’s bidding rather than on the price. This should provide a moment of pause for Time Warner’s shareholders.”

(Corrects story published July 25 to remove “because of price or regulatory issues” in fourth paragraph because it wasn’t part of the original comment, to add that Panagiotidis said he isn’t an expert on the companies, and to change second part of comment to “but there is still a lot of uncertainty about if/what price a deal could happen.”)
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