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Fox's Murdoch Is Playing Chicken With Time Warner to Force a Merger

NEW YORK (TheStreet) -- Yesterday was a bad day for investment bankers when Twenty-First Century Fox (FOXA - Get Report) pulled its $80 billion buyout offer for Time Warner (TWX - Get Report). This was the second major deal to be pulled off the table, with Sprint Corporation (S) withdrawing its $40 billion offer for T-Mobile almost at the same time.

It's not common for Murdoch to abandon deals so quickly. But the resolve of the Time Warner board to fight him certainly prompted the action. Time Warner moved quickly to change its bylaws to make any buyout of the company much harder. Shares of Fox have also been punished since the offer was announced, dropping 10% in a month, to $32.75 as of 1:30 p.m. Wednesday.

Coinciding with the news, Fox announced a $6 billion stock buyback.

Rupert Murdoch stated he wanted to do a friendly takeover, not a hostile one.

What is the more likely scenario is that Murdoch is playing a game of chicken with Time Warner, hoping market pressure will force the board to become more amicable to merging. All indications and expectations were that Murdoch would have paid more for Time Warner than he initially offered.

Now all attention will focus on CEO Jeff Berkes to see if he can get the stock back to the $85 to 90 range it was on news of the original deal. Time Warner's shares were down more than 12% Wednesday at 1:30 p.m., to $74.47.

So far Murdoch's approach is working. Shares of Time Warner are down hard today despite posting strong earnings and profit last night.

Time Warner is still trading above the $71 price it had right before the Murdoch offer, but whether shareholders will accept this is another story. The fast money exited today.

The strong hands money will be left to decide if they will have patience with Berkes or move to force a deal down the road.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates TWENTY-FIRST CENTURY FOX INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate TWENTY-FIRST CENTURY FOX INC (FOXA) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, attractive valuation levels, increase in stock price during the past year and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 12.9%. Since the same quarter one year prior, revenues rose by 11.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. In comparison to the other companies in the Media industry and the overall market, TWENTY-FIRST CENTURY FOX INC's return on equity significantly exceeds that of the industry average and is above that of the S&P 500.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • TWENTY-FIRST CENTURY FOX INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TWENTY-FIRST CENTURY FOX INC increased its bottom line by earning $2.91 versus $0.44 in the prior year. This year, the market expects an improvement in earnings ($3.05 versus $2.91).

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