Time Warner on Upswing Two Years After Murdoch's Failed Takeover Bid
Two years ago this week, Rupert Murdoch's 21st Century Fox (FOXA) - Get Report made a huge, aggressive and ultimately failed bid to acquire Time Warner (TWX) in a deal valued at $80 billion.
To keep Time Warner from being swallowed by a major rival, Time Warner CEO Jeff Bewkes did what few in the media business on either side of the Atlantic have been able to do: rally his shareholders to thwart Murdoch's unwelcome advance.
But as excitement about a possible merger catapulted Time Warner shares to $91, pressure was ratcheted up on Bewkes to make changes at the New York media titan to justify going it alone. When Fox withdrew its offer in August 2014, disappointed shareholders let Time Warner's shares fall as low as $72, well off Murdoch's bid of $85 a share.
Yet in the 24 months since Fox's bid was made public, Bewkes' efforts are beginning to show promising results.
Shares Wednesday were trading hands at around $78, up from $64.67 at the close of 2015.
HBO has become available as a standalone subscription service, making it less vulnerable to cord-cutting. CNN's ratings are enjoying a historic surge after shaking up its programming mix to weave entertainment and educational shows into its traditional news format. And Turner Broadcasting, its cable TV station group, now accounts for more than half of the company's operating income thanks to the escalating fees pay-TV providers pay to carry its coverage of the NBA, NCAA basketball and Major League Baseball.
The result is a company that may be less exposed to consumers' transition to streaming video though not necessarily less vulnerable to a takeover, according to Drexel Hamilton media analyst Tony Wible. (Unlike Fox, Viacom (VIAB) - Get Report and CBS (CBS) - Get Report , Time Warner isn't protected from a hostile bid by a separate class of voting shares.)
"I could definitely see another company having interest in Time Warner, though they don't appear to be interested in selling out," Wible said. "But Time Warner has many advantages compared to others because it has sports content and because its basic cable TV assets are clustered around a fewer number of higher-profile channels."
For the second quarter, Wible expects Turner Broadcasting will have secured a roughly 11% increase in global affiliate fees from pay-TV providers.
Total sales at the company are forecast to rise 5.8% to $2.99 billion for the quarter, while adjusted operated income will slip 0.8% due to the timing of programming costs for Animal Kingdom on TNT and Wrecked on TBS, Wunderlich Securities media analyst Matthew Harrigan said in an investor note Tuesday. Both shows are being heavily marketed as Turner seeks to attract younger viewers for a pair of networks that historically tried to mirror the somewhat older demographics of the major broadcast networks.
Time Warner is set to report earnings on Aug. 3.
Improvement at Time Warner, though, required some pain amid a redirection of growth strategies.
In November, Bewkes cut 1,000 jobs at its Warner Bros. film studio, about 12% of its Burbank, Calif.-based workforce, while HBO eliminated about 7% of its 2,400 employees and Turner let go of 10% of its staff. Reducing costs, he said, was essential to allowing Time Warner to invest in new programming at Turner as well as the HBO NOW online service.
The need for the job cuts became clear in February when the company was forced to take an impairment charge of $36 million after it revealed that Turner had lost subscribers, an ominous sign for a cable TV operator, amid a drop in total sales. Shares that month tumbled as low as $60.07.
Since then, CNN has been a tear with ratings in the second quarter growing 69% above the same period a year ago, according to Harrigan. Ratings at the rest of Turner haven't been nearly as strong, as both TBS and TNT continue to remake their networks with shows such as Angie Tribeca, Wrecked and Animal Kingdom, the Southern California crime family drama starring Ellen Barkin.
Nonetheless, the future may be brighter. Advanced advertising sales at Turner for its fall shows were 11% to 13% higher than in 2015, Wible said. Across the industry, a preliminary estimate of advanced television sales is a 4.5% gain to $18.6 billion, its highest total in three years, according to Media Dynamics.
The biggest change at Time Warner that may have been accelerated by Murdoch's unsolicited bid, though, was the advent of HBO NOW. Murdoch had long coveted HBO, the industry's pre-eminent high-quality entertainment network. Fox was eager to acquire HBO to give its formidable library of films and television shows as well as its many studios a global subscription-based platform.
With Netflix (NFLX) - Get Report grabbing an increasing amount of viewership time, Bewkes introducedHBO NOW, at $15 a month, in October 2014. Since then, the service has steadily grown. Revenue from HBO is expected to have increased 5% in the second quarter, a "modest acceleration," Wells Fargo media analyst Marci Ryvicker said in an investor report Monday.
Yet while HBO's operating income is forecast to rise 3% this year, Wible estimated it would jump 7% next year and then 9% in 2018.
Little wonder, then, that Time Warner shares have jumped 21% this year on the backs of increased affiliate fees for sports programming at its Turner networks. Time Warner's rebound stands in a stark contrast to the performance of Viacom and AMC Networks (AMCX) - Get Report , two companies with niche channels and no sports programming. (Viacom, of course, has benefited lately from speculation that it could be sold or reorganized.)
"If you have broadcast, sports and HBO, you will see disproportionately higher affiliate fee increases than those that don't have that," said Wible, who also has a buy recommendation on Disney (DIS) - Get Report , owner of ABC and ESPN. "Time Warner has some of the most standout assets in the industry."
Though Time Warner continues to trade below Murdoch's 2014 offer price, that could change. Brean Capital this week raised Time Warner's 12-month price target to $90 a share, while Wunderlich set it at $95 a share.