Time Warner CEO Jeff Bewkes just won an indirect endorsement for his argument that his shareholders would be better off letting him lead the company instead of accepting a cash and stock offer from Rupert Murdoch. Without a deal, Time Warner shares should hit $95 within a year, and there’s “a credible stand-alone bull case valuation of $105,” Morgan Stanley Research’s Benjamin Swinburne says today. The numbers are important: Time Warner rejected Murdoch’s $85 a share bid, and many analysts say that he could go as high as $105 before choking on the cost. That probably wouldn’t impress shareholders if they believe that they’ll see that price without the risk that would come with such a big deal.
Swinburne’s analysis begins by accepting Bewkes’ forecast that cable and satellite company payments to Time Warner’s Turner networks will grow at double digit rates each year over the next five years. “Given 7 out of the top 10 distributors have already renewed (as of early ’14), we see limited downside risk to [the] guidance,” the analyst says. Those payments now account for 20% of Time Warner revenues.
HBO also could grow subscriptions and revenues by tinkering with its pricing and deals with pay TV distributors. It has about 30M domestic subscribers, but the below-average penetration rates at Time Warner Cable and Dish Network suggest that there are “key opportunities for HBO to drive further revenue-generating subscriber growth.” Along that line, Bloomberg reported today that HBO is considering expanding a test with Comcast, introduced last year, that offers broadband service, basic TV, and HBO for $49-a-month.
While the top line grows, Swinburne forecasts that Time Warner will cut its corporate overhead expenses from about $375M a year to $350M beginning in 2015 — and could take the number down to $250M. He also expects the company to spend at least $26B over the next five years to repurchase its stock, which would reduce the total by about 25% and make remaining shares more valuable.
In calculating Time Warner’s value, Swinburne figures that the Turner networks will be worth about $48.3B in 2016 (+6.2% vs 2014), with HBO at $28.5B (+7.4%), the Warner Bros film studio at $6.6B (+3.2%), and the Warner Bros TV studio at $12.0B (+5.7%).