Time Warner to Fox: $100+ or forget it

image credit: Jim Larrison

Time Warner Inc.’s (NYSE:TWX) board is daring Rupert Murdoch to make an offer he can’t afford.

In rejecting an $85-per-share takeover bid by Murdoch’s 21st Century Fox Inc. (NASDAQ:FOX) last week, Time Warner said its own growth plan “is superior to any proposal that 21st Century Fox is in a position to offer.”

That language -- “in a position to offer” -- was no accident. After evaluating Fox’s books, Time Warner concluded that Murdoch would be uncomfortable financing a deal above $100 a share, people familiar with the matter said. The purchase would require so much borrowing it could sacrifice Fox’s credit rating, or use so much stock that existing investors’ holdings would diminish in value, said the people, who asked not to be identified because internal deliberations are private.

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, the people said. Fox isn’t currently planning to bid more than $90 to $95 a share, according to a person familiar with Fox’s position.

“We remain of the strong opinion that TWX is likely to successfully maintain a ‘just say no’ defense at any price level that Fox could reasonably come up with,” Doug Creutz, an analyst at Cowen & Co. who has been following the media industry for a decade, said in a note to clients this week.

Higher bids

Time Warner’s view is supported by credit-rating agency Standard & Poor’s. It estimates that Murdoch, 83, can add cash to raise the offer to no more than $93 a share without risking a downgrade to junk. The agency said it hasn’t set a limit on how high Murdoch can go to maintain investment grade. Moody’s Investors Service, however, concludes Fox could lift its bid to $105 a share -- borrowing as much as $21 billion -- while still remaining investment grade.

“In combining the two, it would be fair to assume it can take on a little more leverage -- but not too much,” Chris Valentine, a credit analyst for S&P, said in a phone interview. He added that the combined company could take on more debt than either can by itself.

The $85-a-share cash-and-stock offer valued New York-based Time Warner at about $75 billion, excluding options that could raise the total equity value to $80 billion. Each dollar per share that Murdoch raises his bid costs almost $1 billion.

After receiving a bid from New York-based Fox on June 9, Time Warner’s board spent weeks evaluating potential higher bids because it assumed Murdoch would be aggressive, said one of the people. The analysis, based on a multiple of Time Warner’s earnings, concluded any bid in the mid- to upper-$90s should be immediately rejected, the person said.

Upper limit

The board also determined that Murdoch would be uncomfortable boosting the company’s leverage above 4 times earnings before interest, taxes, depreciation and amortization, according to people familiar with the matter. Based on that, the board calculated that Murdoch couldn’t offer the $100 a share or more that would prompt Time Warner to begin talks, the people said. Time Warner also wouldn’t sell to Murdoch without first running a broad auction process to see if there are other bidders, one of the people said.

In any deal for Time Warner, Fox’s goal is to keep its investment-grade credit rating, said a person familiar with the matter. The company is willing to increase its current offer while maintaining discipline on leverage and price, the person said. Borrowing at 4 times Ebitda isn’t a deal killer, the person added, if an analysis of Time Warner’s books justifies it.

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