Fox Is Playing Offense and Defense in Tribune Takeover BidBy
Proposals said to be due Thursday for owner of Fox stations
Sinclair, Nexstar also said to be preparing bids for Tribune
21st Century Fox Inc.’s bid to combine its local TV stations with Tribune Media Co. would solve a lot of problems at once for Rupert Murdoch.
The proposal, with funding from Blackstone Group LP, would help Fox prevent Sinclair Broadcast Group Inc. from buying Tribune and gaining bargaining power by owning 28 percent of the nation’s Fox affiliate stations. It would also help Fox reduce its debt and obtain an infusion of cash that could surpass $1 billion.
And it would give the Murdoch-controlled media giant a way to retain some control over TV stations, including in big markets like New York, without having to include the slow-growing business in its financial statements.
The potential transaction “makes a lot of sense to us both from an offensive and defensive point of view for Fox,” Michael Nathanson, an analyst at MoffettNathanson LLC, said in a note this week.
Bids for Tribune Media are due Thursday, and Fox’s proposal will have to beat out offers from Sinclair and Nexstar Media Group Inc., according to people familiar with the matter. Interest in Tribune has picked up as potential bidders anticipated that federal regulators would loosen TV ownership rules, a step they took last week.
For Fox, those new rules opened up a can of worms. Sinclair owns 54 local Fox affiliates across the country, from Pittsburgh’s WPGH to Oklahoma City’s KOKH. Gaining the 16 owned by Tribune, including Seattle’s KCPQ and Denver’s KDVR, would extend Sinclair’s lead as the largest owner of local Fox stations across the U.S.
Fox gets payments from affiliates for the use of its national programming -- shows like “Empire” and football broadcasts -- and a beefed-up Sinclair could drive a harder bargain in negotiations. Nexstar, with its 26 Fox affiliates, would also have a stronger hand if it won the bidding for Tribune.
To head off the affiliate owners, Fox and Blackstone have concocted an unorthodox plan to create their own bid for Tribune. Fox plans to contribute its owned-and-operated stations to a joint venture with Blackstone, a person familiar with the situation said this week. Blackstone would fund the cash bid for Tribune, and Fox would get a cash payout as a result of the deal, the person said.
Fox declined to comment.
Based on estimates of the value of Tribune’s and Fox’s stations, Blackstone would have to pay Fox more than $1 billion to get a 50 percent interest in the joint venture, according to Barton Crockett, an analyst at FBR & Co. He valued Fox’s TV stations, which include New York’s WNYW and Los Angeles’ KTTV, at $8.95 billion.
Fox would transfer as much as $6 billion in debt to the joint venture, reducing its leverage, according to Alan Gould at Rosenblatt Securities Inc. That could come in handy as Fox pursues a separate transaction to buy full control of its British satellite TV unit, Sky Plc, in a deal valued at about $14 billion.
Both deals are about “consolidating distribution,” Peter Rice, who leads the company’s networks division, said Wednesday at the Milken Institute Global Conference in Beverly Hills, California.
The joint venture with Blackstone could sell stations owned by Tribune that are affiliated with CBS, ABC or NBC, Gould said. That would force Fox rivals like CBS Corp. to make tough decisions about whether to acquire more of their own affiliates.
A 50-50 ownership split with Blackstone would also give Fox some options for the future. Without a majority stake, Fox wouldn’t have to include the joint venture in its consolidated results. And Murdoch’s company could get an option to acquire the full business later, said Benjamin Swinburne, an analyst at Morgan Stanley, in a research note.
On the other hand, Fox could decide to sell off its stake in the joint venture in the long term, Swinburne said. That would give Fox a way to bail out of the local-TV business if viewers continue to turn off traditional TV for shows from Netflix and videos from Snapchat, causing advertising sales to worsen.
Fox shares dropped as much as 4.1 percent to $29.18 on Wednesday after rival Time Warner Inc. reported a first-quarter decline in TV advertising -- a reminder of the pressures facing television companies.
Of course, Sinclair or Nexstar may present a better offer to Tribune. Fox and Blackstone are proposing an all-cash transaction, while Sinclair and Nexstar could offer stock, which could help Tribune shareholders avoid taxes and share in upside from the merger, FBR’s Crockett said. Fox and Blackstone’s deal would need to clear some regulatory hurdles. Fox shareholders also might balk at a joint venture that makes the company’s capital structure more difficult to understand.
But Fox has some sway over Tribune’s destiny because it has to consent to the transfer of the company’s affiliate agreements to a new owner in the event of a takeover, people familiar with the matter said in March. That could come in handy if Sinclair, which acquired the Tennis Channel last year, develops further ambitions in providing nationwide TV programming, such as creating its own competitor to Fox News or acquiring football broadcast rights, Nathanson said.
“A Fox/Blackstone deal for Tribune would create value for Fox shareholders and help defend against the formation of a potential long-term rival,” he said.
— With assistance by Christopher Palmeri