Does Time Warner Need CBS To Thwart A Fox Takeover?

Time Warner CEO Jeff Bewkes has a problem. Fox CEO Rupert Murdoch is preparing to sweeten his offer for the owner of Warner Bros, CNN, and HBO after it rejected an $80B cash-and-stock proposal last month. And Bewkes, who says he wants to keep Time Warner independent, has few takeover defenses. What can he do? Here are a few of the leading options that Time Warner execs and their advisors at Citigroup are weighing.

Corporate And Media Leaders Attend Allen & Company Media And Technology Conf.Combine with CBS: This would make Time Warner toxic for Fox: The FCC would not allow Murdoch to control two of the four biggest networks, and two of the largest TV station groups with overlaps in the nation’s largest markets.

And the business logic of a Time Warner-CBS combination is compelling. CBS chief Les Moonves would like to diversify his company to make it less dependent on domestic TV advertising. (He has already said that he’d like to buy CNN if Fox prevails with Time Warner and puts the news channel on the block.) Moonves also has made it clear that he’d like to play a bigger role in movies — his CBS Films appears to be struggling to figure out its identity. CBS could address these concerns by blending with Time Warner’s cable channels and movie studio.

The chief obstacle is that CBS is controlled by Sumner Redstone, who also owns Viacom. He hasn’t wanted to give up either property, and some bankers believe he’d prefer to recombine the companies he split in 2005 than do something with Time Warner.

Big Brothers Big Sisters Of Greater Los Angeles Guild Special Cocktail Reception Celebrating 2012 "Big Bash Gala" HonoreesBut if Time Warner found terms that could satisfy Redstone, then a merger likely would have little trouble winning regulatory approval. The biggest concern might be that a combined entity would dominate TV production, although that market would still have formidable competitors including Fox. (Warner Bros had 20 shows on broadcast TV and 15 on cable in the 2013-14 season while CBS had 17 and two.) Time Warner and CBS co-own CW; that might have to be divested if regulators objected to having it under the same roof with CBS. Then there’s HBO and Showtime. Antitrust officials might accept having the rivals at the same company if they include online services in their definition of the marketplace, seeing the premium channels in competition with Internet rivals such as Netflix and Amazon Prime.

Would Moonves want to play? Dealmakers are split on this. He’d likely have to settle for a secondary role at Time Warner. Although CBS has a strong balance sheet, with more than $5B in cash as of the end of March, it probably doesn’t have the financial wherewithal to outbid Murdoch and buy Time Warner outright. (Moonves’ pride might be soothed if the companies deemed a new role for him to be a “without cause termination” as CEO: His CBS contract calls for a $190.3M payout if that happened.)

Moonves also has other options.

His company is sniffing around Univision, as is Time Warner. Owners of the leading Spanish language broadcaster are looking for at least $20B, a price that outsiders consider unrealistically high.

Lionsgate might satisfy Moonves’ desire to play a bigger role in movies and TV production, and deepen CBS’ library. The companies played well together last year when Lionsgate sold CBS a 50% stake in TVGN (the TV Guide Network). The mini-major studio is seen as a potential acquisition target with a market cap of about $4.5B. It has lots of fans on Wall Street following its hot streak with young adult franchises including The Hunger Games and Twilight. But some warn that earnings could fall off a cliff in 2016 if it can’t find another hit franchise after it releases the last Hunger Games movie, scheduled for November 2015.

One strong fit appears to be off the table, though: Sony CEO Kazuo Hirai remains resolute about holding on to the company’s film and TV properties, I’m told.

Google logoTeam with tech. Silicon Valley titans still see themselves as conduits for other people’s content. But they understand that the best opportunity to grow on the Internet is to offer scripted video — especially fare that advertisers like. That’s led to this intriguing possibility: Bewkes could invite a large tech company such as Google to become a white knight and buy a large, strategic stake in Time Warner that leaves the company in his hands.

He could argue that if Time Warner goes to Fox, then they’ll lose one of the best opportunities they’ll ever see to secure a major production company with such a vast library. Fox, Viacom (Paramount), and Comcast (Universal) are all controlled by families with no apparent desire to sell. That leaves Disney, which may be too diversified; Internet companies don’t need theme parks. A tech company that buys a big stake in Time Warner could spend years learning the nuances of the entertainment business until it’s ready to make a commitment — or sell.

Image (1) New-Discovery-logo__140506120504.jpg for post 724751Buy something big. Discovery is the name that comes up most often. It’s shares are up 5.8% since news of Fox’s interest in Time Warner spread, giving it a market cap of $19B. But Discovery has big ambitions of its own, and strong support from its largest shareholder, Liberty Media’s John Malone.

Do nothing. Bewkes could try to persuade shareholders that they have more to gain by letting him run the company for a few more years than they would by taking Murdoch’s cash and stock now. The company seems poised for a growth spurt, especially now that it has spun off its Time Inc magazines.

Bewkes is resolutely upbeat about international and digital prospects for Warner Bros and HBO, his success stories. And he says that he’s addressing problems including disappointing ratings at CNN, TBS, and TNT. “CNN is showing great momentum right now,” he told analysts in April. Meanwhile TBS and TNT ratings “are softer than they are going to be…This is all going to get a lot better and turn into a fairly strong mid-term and out earnings story at Turner.” He forecasts double-digit annual growth in subscription revenues through 2018 at the networks.

Still, doing nothing would be the equivalent of a Hail Mary pass. There are too many investors who can’t see past the next quarter, and love the certainty of cash and stock that they can trade now.

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