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) made an $80 billion bid for Time Warner  (TWX) 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."

2. Murdoch Is the Elephant in the Room

While price and valuation will be what tip the scales to a deal being made, Fox could entice Time Warner shareholders by offering them representation in a newly combined company, something not promised in the initial offer of non-voting stock. As the deal stands, Time Warner shareholders would own a 40% stake in the new company but have no voice. 

Offering preferred stock would assuage some of the fears of relinquishing control of the company to the Murdoch family, said Christopher Marangi, portfolio manager for Gabelli Funds, which has holdings in both Time Warner and Fox. However, analysts note how unlikely Murdoch would be to dilute his 39% controlling interest, particularly given how he is pushing for his son, James, to succeed him in helming the business.

And while reports are that Fox will offer board representation to sweeten a second-round offer, the offer is a shallow one. "Board seats don't necessarily do a whole lot of good when somebody else controls the board," said Marangi.

This then leads us back to reason one: it will take a lot of cash to keep Time Warner shareholders quiet. 

3. 'It's Not You; It's Me'

Discussions of a friendly acquisition will be moot, though, if Time Warner management decides it isn't interested in any deal offered. That's a line of thinking Bewkes proffered in the company's rejection of the initial bid, arguing the company's strategic plan is "superior to any proposal that Twenty-First Century Fox is in a position to offer."

That's the crux of Time Warner's argument -- that $85 a share, or even higher, doesn't sufficiently credit the company's potential.

"They finally feel like they've got the right assets set up in the right position with the right people that they can do some really exciting things going forward," added Creutz. "They feel like Rupert understands that and that's why he's making the bid now as opposed to waiting until later. He thinks maybe he can get it for cheap."

Time Warner executives are confident in their potential but Bewkes will need to persuade shareholders to rally behind their vision for this deal to truly die.

Bewkes could take notes from another high-profile executive who faced the same kinds of challenges, said Miller. A decade ago, former Walt Disney  (DIS) Chairman Michael Eisner had to convince shareholders the $54 billion bid (or $66 billion including the assumption of $12 billion in debt) Comcast had made was not in the company's best interest.

Since Comcast made that offer in February 2004, shares have more than tripled (and outpaced the S&P 500 nearly fourfold) as Disney became the world's largest entertainment company with a market cap of more than $147 billion.

We'll see whether Time Warner has the chance to do likewise while remaining independent.

--Written by Keris Alison Lahiff in New York. 

More from Mergers and Acquisitions

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Square Shares Shake Off Concerns About PayPal's Deal for iZettle

Square Shares Shake Off Concerns About PayPal's Deal for iZettle

It's a Family Feud - CBS is Granted Restraining Order Against Shari Redstone

It's a Family Feud - CBS is Granted Restraining Order Against Shari Redstone

How Qualcomm's CEO Is Helping Steer the Shift to 5G

How Qualcomm's CEO Is Helping Steer the Shift to 5G