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Time Warner Would Be Crazy Like a Fox to Sell HBO


Rocco Pendola published a story on July 21st here TheStreet entitled Time Warner Would Be Insane to Sell HBO, and I respectfully disagree with him.

Here's why:

Time Warner (TWX) CEO Jeff Bewkes has to sell to 21st Century Fox (FOXA) and its Chairman Rupert Murdoch. This is a once in a lifetime opportunity for Bewkes and Time Warner shareholders. Not every day do one of the most powerful people in the world come knocking to give you a $100 billion check, give or take a few billion.

In 2001, Citigroup (C), the seventh-most powerful major bank in the world with annual profits of $13.4 billion, decided to buy Banamex, the largest bank in Mexico, founded in 1884. But shareholders declined that offer just like Time Warner (TWX) shareholders already declined the current offer.

Alfredo Harp Helu who was the CEO of Banamex at the time and Citigroup offered this simple but effective deal: Convince the rest of the shareholders to sell the bank and you get 10% of the deal.

Banamex was eventually sold to Citigroup for $12.5 billion and he got $1.25 billion and he became one of the wealthiest men in the world at the time. 13 years later he is still the 16th wealthiest man in Mexico with a fortune of $942 million.

NOTE TO RUPERT MURDOCH: Offer Bewkes 1% of the deal and he will become one of the wealthiest people in the world overnight.

HBO is not the largest Time Warner business by sales. In fact, this subsidiary is the smallest. Almost half of the money from Time Warner comes from Warner Bros. Revenues for this subsidiary were $12.3 billion in 2013. In second place comes Turner, which brings almost $10 billion to the table or almost 40%. HBO is a distant third place with only $4.9 billion in revenues.

When you are buying a company as large as Time Warner you need to recover your investment using synergies.

HBO may be a very valuable cash cow and if you use your credit cards to buy this company then you can pay your monthly payments to MasterCard (MA), Visa (V), American Express  (AXP) and Discover Financial Services (DFS) with the massive annual profits of $3.6 billion the company currently has.

Nobody in the media industry can write a $27 billion check, assuming he increases the offer to $90 billion and also increases the stock component to 70% from 60%, not even Rupert Murdoch. If he wants to buy Time Warner he needs to do three things:

  • Sell some assets, which he is doing right now.
  • Sell some Time Warner assets like CNN, which Leslie Moonves, the CEO of CBS (CBS) wants.
  • Swap 49% of DC Comics for 49% of Marvel Comics in order to produce this film and this film, which obviously would sell more movie tickets than Avatar and Titanic combined.

If you think the film Captain America: The Winter soldier was a huge financial success with worldwide ticket sales of $721,908,352 then wait until you see the film Batman versus Captain America.

Assuming the annual profits remain constant from now on; you can pay your entire $27 billion credit card debt in only 7.5 years. Rupert Murdoch would be dead by that time, possibly. However, he has six children that can give the megacorporation The Walt Disney Comcast which does not exist yet, a run for its money.

Comcast (CMCSA), (CMCSK) already tried to buy The Walt Disney Company (DIS) for $66 billion a decade ago and they will try again with a $166 billion offer in the future.

What exactly is synergy?

As you can see, any billionaire can buy any company in the world just writing a check from his savings account and taking a few credit cards from his wallet to pay the rest. You use the profits from the company you are buying to pay your debts and you don't have to do anything anymore.

Unlike the rest of us, if you are already a billionaire you cannot just buy another company to make more money.

Where is the fun in that?

They are, after all, still human beings.

Regular people buy a broken car and visit junk yards and find all the parts and negotiate a lot on the price of each part even if the part costs only $100 just for fun. Driving a car that you found abandoned on the street gives you more satisfaction than driving an Aston Martin Vanquish.

This is better explained in the film Seabiscuit, which I recommend.

Italian Billionaires buy a broken car company like Chrysler and fix it.

Indian Billionaires buy two broken cars companies like Land Rover and Jaguar and fix them.

Rupert Murdoch is going to dismantle Time Warner on his garage and observe all the pieces lying on the floor for a very long time and identify an old piece that is not making any money anymore like The Flinstones and sell it to the highest bidder or maybe he will hire Brad Bird to write and direct a new computer animated film for a new generation of moviegoers.

He will write a $150 million check and patiently wait five long years until his personal assistant tells him the premiere is tomorrow and he will attend.

Nobody in the world will enjoy this film more than him. It does not even matter if the film fails to sell at least $300 million in movie tickets worldwide. HE MADE IT HAPPEN.

Remember, this old piece was just stored in a vault somewhere inside Time Warner, and he saw the potential and created wealth out of thin air.

Now multiply this very simplified example by another thousand pieces.

I don't know about you, but I would love to work as a grease monkey on his garage. The smart executives currently working for him are not doing it for the money. They just have eight figure salaries only to stop AT&T (T) from hiring them.

They are probably extremely happy with a $1 salary.

It is extremely difficult to make a film and lose money if you hire Brad Bird as a writer and director, which means you will probably be alright if you invest in Time Warner or in 21st Century Fox (FOX), (FOXA) or in Fox Brothers as I like to call the combined company.


I have a lot of free time on my hands and I like to pretend that I work for Jeffrey Bewkes and I am in charge of increasing annual profits from $3.6 billion to $6.6 billion, which is what The Walt Disney Company currently makes and I always find a lot of ways to increase profits for Time Warner shareholders.

If I can find a lot of ways to make more money with all the brands Time Warner currently holds then so can Rupert Murdoch. He is way smarter than me or Is it smarter than I? See?

At the time of publication, the author held no positions in any of the stocks mentioned.

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