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3 Reasons 21st Century Fox's Play for Time Warner Is a Long Shot

NEW YORK ( TheStreet) -- Here's where we left off. Two weeks ago, 21st Century Fox  (FOXA - Get Report) made an $80 billion bid for Time Warner  (TWX - Get Report) to which its CEO Jeff Bewkes said "Thanks, but no thanks." As is the case with corporate takeover intrigues, there has been backroom chatter on whether Fox chairman and media mogul Rupert Murdoch could cede a fraction of his control and whether an offer for board representation would be made to sweeten the deal. But since the initial offer, all has been quiet on official news.

As both companies gear up to report earnings (both on Aug. 6, Time Warner before the bell, Fox after), progress could come sooner than later.

"Give it another week and there'll be an improved offer and we'll let the chips fall and see what happens," said David Miller, analyst for Topeka Capital Markets, in a phone interview. "The question is, will it be good enough to get the deal done?"

The New York-based companies' respective conference calls will be telling. In Time Warner's, Bewkes will have to explain why the company rejected an $85-a-share deal, an offer which valued the company at a 20% premium at the time. Further explanation will also be needed as to why the company felt it necessary to implement a poison pill by which a temporary ban was placed on shareholders calling special meetings.

Meanwhile, Fox CEO Murdoch and COO Chase Carey will need to be convincing as to why the company should continue its pursuit of Time Warner or risk losing shareholders' faith and decimating their own currency. "They'll have to be pretty persuasive as to why this is a good deal," noted Cowen & Co's Doug Creutz, speaking with TheStreet. "Up until now what has been said has not been. Yes it would be bigger, but so what?"

So it will be a battle of words in coming days, justifying the strategic sense of each company's moves. But for those betting on the eventuality of Time Warner consenting to a takeover, prepare for a long wait. Fox needs more than words; this deal will take a lot of green to grease the wheels.

1. Fox Doesn't Have the Cash to Tempt Time Warner

For a Time Warner deal to be feasible, Fox's offer would have to exceed its current $85-a-share valuation. "It's hard to imagine that a deal that's not close to $100 a share would excite the company and its shareholders enough to move forward," S&P Capital IQ analyst Tuna Amobi said in comments to TheStreet.

Ever since news of the offer broke two weeks ago, Fox has been putting its billion-dollar ducks in a row. Recently, the company confirmed its sale of its pay-TV assets in Germany and Italy to BSkyB, raising around $7.2 billion in cash.

Billions of dollars richer but still short the kind of capital a deal might require. Miller did the math: If we assume a hypothetical $95-a-share all-cash deal (though its first offer was comprised of majority stock to cash), that would equate to an $86.5 billion offer. Fox currently has $5.5 billion on the balance sheet so, minus the $7.2 billion from its recent asset sales, it still needs another $73.7 billion.

"Where are they going to get that kind of money?" Miller asked. "Mathematically the company cannot buy Time Warner for all-cash even at the current offer."

What could work in Fox's benefit, though, is its timing. Its offer comes at a time when other bidders -- bidders who could spark a bidding war which would inflate Time Warner's price -- are wrapped up in other deals. For example, Comcast (CMCSA) has its cash tied up in a deal for Time Warner Cable (TWC), while AT&T (T) is busy with its DirecTV (DTV) acquisition.

"This is the classic monopsony situation: there's one potential buyer, there's one potential seller. There's no auction process," explained Miller. "Who else is going to buy Time Warner? Nobody. There's no other bidder."

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