Fox Rationale for Time Warner Unraveled With Share Drop
Nothing focuses the mind like a deadline.
For 21st Century Fox Inc. (FOXA), zero hour was scheduled to arrive today at 4:30 p.m. New York time, with the media company’s quarterly earnings call. Chairman and Chief Executive Officer Rupert Murdoch, President and co-Chief Operating Officer Chase Carey and other Fox executives knew investors would be focused on the company’s $75 billion pursuit of Time Warner Inc. (TWX)
As Fox and its advisers prepared for the call and the remarks they would make, they began to conclude they wouldn’t succeed in the chase and should say so in advance, said several people familiar with the matter. While the buyout plan unraveled, yesterday’s abandonment of the bid sent Fox shares rocketing. Time Warner, meanwhile, lost most of the gain it enjoyed while CEO Jeff Bewkes fought off Fox’s bid.
No one event changed Fox’s thinking, the people said -- rather a gradual realization over several days that there wasn’t going to be a deal that would benefit investors of Fox. Large and small shareholders of both companies, especially arbitrage or event-driven market participants, assumed the deal would get done in the upper $90-a-share range and traded accordingly, said one of the people.
While the proposal had merit, Time Warner refused to negotiate, Murdoch said in a statement. “Additionally, the reaction in our share price since our proposal was made undervalues our stock and makes the transaction unattractive to Fox shareholders,” he said.
Since the bid was made public on July 16, a handful of Fox executives -- Murdoch, 83; Carey; Chief Financial Officer John Nallen; and two of Murdoch’s sons, co-COO James Murdoch and Fox non-executive co-Chairman Lachlan Murdoch -- considered whether to make another offer, according to the people. They came close to doing so and were weighing a bid for as much as $95, but reconsidered when they saw the stock’s reaction, the people said.
During that period, shares of New York-based Fox mostly fell. As of yesterday’s close, the company, home to Fox News, FX and Fox Sports 1, had declined 11 percent to $31.30 since July 15. Time Warner, also based in New York, surged 20 percent to $85.19.
Today, Time Warner dropped 13 percent to $74.24 at the close in New York, the biggest drop since November 2008. Fox rose 3.3 percent to $32.33, the most since May.
As a result of the stock drop, a higher bid that would include Fox shares became even more expensive and less attractive for its shareholders, said the people. Fox was unable to convince investors on either the Fox or Time Warner side that Murdoch would be disciplined in bidding, said two of the people. The expectation he would go higher, perhaps to $100 a share, pushed Fox shares down and Time Warner up.
Furthermore, Time Warner was unwilling to engage at all after rejecting the bid in a terse letter and brief phone call last month, said one of the people. Murdoch wanted to make it a friendly deal, this person added.
Fox had assumed a bump from $85 a share would eventually be likely. However, doing so became more of a challenge given the market and investor reaction to the deal, said the people. Investors didn’t challenge the industrial logic or cost-cutting that could come from the deal, the people said.
Fox anticipated a new bid would have to be at least $90 a share and include more cash to get Time Warner interested, said one of the people. However, to replace shares with cash would likely have turned the deal from about two-thirds stock to an almost 50-50 offer. That would push Fox to leverage of five times earnings before interest, taxes, depreciation and amortization, a debt threshold the company wanted to avoid.
The final decision to abandon the bid was made on Aug. 4 on the Fox lot in Los Angeles, said one of the people. Murdoch’s inner circle met after he returned from a Fox Sports retreat, from which he tweeted a picture of himself with National Football League Commissioner Roger Goodell. Fox wanted to be in control of its own destiny, the person said.
Carey was the main driver behind the plan to buy back stock, the people said. There was no last attempt to negotiate with Time Warner, according to one of the people. While Murdoch and his lieutenants viewed a merger with Time Warner as a unique opportunity, they never saw it as a necessity, the person said.
Yesterday the company had its scheduled annual summer board meeting, attended in person by all the directors.
In extended trading after yesterday’s announcement, Class A nonvoting shares of Fox surged as much as 11 percent to $34.71. Time Warner dropped as much as 14 percent to $72.85.
Fox will now focus on its $6 billion stock buyback and its own stand-alone plan, the people said. It has no plans to come back at Time Warner or to pursue another deal, they added.