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TWX - Time Warner


Zorrofan
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I am a little surprised that this hasn't been mentioned yet on the board! Now that Fox has made an initial offer, which was rebuffed by the Time Warner board, it would seem that the company is in play.  Mario Gabelli, a shareholder in both TWX and FOX , said in an interview last week that Murdoch should offer Time Warner investors a couple of board seats.  He also mentioned a stock price north of $100.

 

I am sure FOX (Murdoch) is preparing a new bid, that TWX will be looking at strategies to raise the price of the stock and ward Murdoch off and yet the share price closes today below the initial offer.  There are also a number of investment funds that hold shares in both companies. It seems to me that some sort of deal will get done, it is just a question of with who and at what price.  Even Google has been mentioned as a possible white knight, as they might be interested in TWX for content.

 

This could be an interesting takeover play!

 

cheers

Zorro

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Given Murdoch's takeover history, it is virtually a certainty that TWX will get acquired by Fox. Question is only when, at what price and what the stock/cash composition will be. It will be safe to say that TWX won't consider anything less than $95 and probably $100. It is however highly unlikely that Google or any other tech company will step in, as the deal wouldn't make any financial or strategic sense (and Google is a bit more rational than AOL was, nor does it have a highly overvalued stock currency to use). The current deal spread indicates that a takeover is unlikely either because of TWX's reluctance or because of regulatory issues, which creates significant opportunities. The board and the largest shareholders will agree to a deal at the $95-$100 range, even though they probably despise the fact that Murdoch - the antithesis of TWX's culture and politics - will get the company. Disney, CBS or Yahoo could buy CNN for $8bn, which would reduce regulatory concerns. Besides 20th Century Fox and Warner Brothers will not monopolise the movie industry, so that wouldn't be a regulatory concern either.  Therefore, buying TWX at current prices or lower prices makes a lot of sense. It even makes a lot of sense to buy the Jan 2015 $80 calls or perhaps even the $90 calls, as the revised bid announcement would likely arrive within that timeframe. Even if the revised bid would include a higher mix of FOX stock, it remains attractive as FOX shares are a bit more attractive after the recent share price decline.

 

Another scenario could be that Time Warner becomes more aggressive in terms of laying out their own strategy. They could announce a HBO IPO, an increased share buyback program or potentially a merger with CBS. The latter option would make sense as both companies' cultures match and would create a powerhouse in movie production, cable and broadcasting. Such an announcement could cause a temporary decline in the share price. However, coming back to my original point, Murdoch never gives in. He has overpaid for assets in the 1980s, 1990s, 2000s. He wants TWX, so he probably will get it in order to finish his legacy in the media industry and to create a more formidable content producer that has better pricing power with a more consolidated distribution industry.

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TWX response has been rather uninspiring to say the least. The share buyback and earnings beat did not seem to impress the market. This sell-off, which is to be expected, will pressure TWX board to do something in the next few months or some rather large shareholders are going to be p***ed-off the board didn't enter into negotiations.......  my guess is some sort of a deal gets down, it may be with Fox or it may be CBS but I still think things are in play.

 

cheers

Zorro

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  • 1 year later...

Thoughts on TWX at current prices?

 

Stock sold off quite a bit due to cord-cutting concerns (i.e. Netflix, Amazon Prime, etc). But it is still not cheap enough to interest me here. TWX is offering a 6% unlevered yield at current prices. Instead of TWX, I bought VIAB and FOXA. FOXA in particular is better value (10% unlevered yield, similar quality business).

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Stock sold off quite a bit due to cord-cutting concerns (i.e. Netflix, Amazon Prime, etc). But it is still not cheap enough to interest me here. TWX is offering a 6% unlevered yield at current prices. Instead of TWX, I bought VIAB and FOXA. FOXA in particular is better value (10% unlevered yield, similar quality business).

 

VIAB and FOXA are not similar quality businesses though.

 

Most importantly, TWX owns HBO, which is a high quality business with significant competitive advantages and growth potential that is more comparable with Netflix than the legacy networks that Fox and Viacom own. Estimates of HBO's value range from 20 bn to 35 bn.

 

Twx is trading at just 55 bn.

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Whilst HBO is a great business model, the threats that it is facing should not be discounted.

An element of the bear thesis is that HBO 'over-earned' in the past decade. The beauty of capitalism is that capital sloshes into markets where incumbents have earned a high rate of return. In HBO's case, it was the incumbent, and the new 'capital' is Amazon and Netflix. The market is big and growing, but my (probabilistic) belief is that Amazon and Netflix will capture a greater portion of the future growth than HBO.

 

The question then becomes: is the 6-7% FCF yield offered by TWX sufficient compensation to take on this growing competitive risk? Maybe it is. If HBO's cash flows went to zero, TWX would offer a 4-5% FCF yield. I'm still thinking that one through.

 

And with regards to FOXA and VIAB - I group them together with TWX and just think of them in my head as 'content producers'.

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HBO cash flows to zero, in what world do you live?

 

I don't think HBO cash flows are in any sense going to zero but I too am a bit skeptical of the bull thesis built on HBO Netflix comparisons.

 

HBO has a great library and continues to produce great content BUT enormous capital is being hurled into this area and I think consumers don't really care about what channel their series is shown on.  In the same way I wouldn't buy Netflix at nosebleed levels I also wouldn't use a high multiple for HBO.  Just my personal opinion, but there seem to be a lot of guys out there producing HBO quality tv series at the moment, and some of them are happy to break-even or lose money.  I remember a few years ago the situation was very different,  nearly all of the good US shows were made by HBO.

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HBO cash flows to zero, in what world do you live?

 

I don't think HBO cash flows are in any sense going to zero but I too am a bit skeptical of the bull thesis built on HBO Netflix comparisons.

 

HBO has a great library and continues to produce great content BUT enormous capital is being hurled into this area and I think consumers don't really care about what channel their series is shown on.  In the same way I wouldn't buy Netflix at nosebleed levels I also wouldn't use a high multiple for HBO.  Just my personal opinion, but there seem to be a lot of guys out there producing HBO quality tv series at the moment, and some of them are happy to break-even or lose money.  I remember a few years ago the situation was very different,  nearly all of the good US shows were made by HBO.

 

I agree. I think you've articulated it very well.

 

My wife has an Amazon Prime subscription. We are very happy with Amazon's video offering; the 3rd-party content coverage there is great, and the Amazon-produced shows are also of a decent (and improving) quality. Now that our household subscribes to Prime, as rational consumers, we are likely to (at some point) discontinue our satellite package. Who loses? HBO, DISH, and their ilk. HBO's moat is narrowing. Like you've said: my household does not care what channel I am getting my content on, and there is an absolute deluge of high-quality content out there. And it is not just Amazon and Netflix. There are whole teams at Apple who spend tens of millions (or more) each year just sitting around and brainstorming ways to revolutionise the living room and take a share of the pie. See Apple's comments that presaged the mobile ad-blocking, where Apple basically said that it made no sense to them just how much user data advertisers were hoovering up, and how much they were over-earning. What we are witnessing with HBO/etc is pure capitalism at work. Excess profits are eventually competed away. Tons of capital is flowing into the sector with a goal of A) producing great content, and B) on-boarding the customer to a platform and locking them in.

 

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HBO cash flows to zero, in what world do you live?

It was a mental exercise. Of course I do not believe that HBO's cash flows will go to zero. At least, not in the next 5 years.

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HBO has a great library and continues to produce great content BUT enormous capital is being hurled into this area and I think consumers don't really care about what channel their series is shown on.  In the same way I wouldn't buy Netflix at nosebleed levels I also wouldn't use a high multiple for HBO.  Just my personal opinion, but there seem to be a lot of guys out there producing HBO quality tv series at the moment, and some of them are happy to break-even or lose money.  I remember a few years ago the situation was very different,  nearly all of the good US shows were made by HBO.

 

HBO is still profitable, and has been increasing its profitability steadily over the last 10 years despite growing competition. I would argue that competition isn't even that big of an issue for a business like HBO. Content isn't a commodity product. One network cannot completely replace one another just because they both produce 'quality' content. Now action flicks, rom-coms, movies that have no real plot etc, maybe those are more commoditized - what really differentiates a superhero movie from another?, but honestly if HBO keeps on making quality, must-watch content, I highly doubt Netflix's success would affect it. Bloodline isn't a substitute for The Wire. GoT isn't a substitute for HoC.

 

It's more likely they would both take share from other networks.

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Folks can only spend a finite amount of time watching tv as entertainment. If there is more quality programming (competition) then people will have more options to pick from. If there are more viable options then it seems likely that less folks will choose HBO (only because they are the market leader in high-quality programming, at the moment).

 

I agree that content isn't a commodity, per se, but it is commodity-like from a tier perspective. Some people only watch high-quality programming (Breaking Bad, GoT, HBO shows, ect). If there are more options in this category then folks can become more picky with their high-quality programming choices. Instead of watching any high-quality show, they can only watch fantasy-based or reality-based shows. Competition could compartmentalize high-quality programming just like cable did for regular shows.

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  • 1 year later...

Has anyone looked at this potential merger arb trade? At&t offered ~108 (cash and stock) and it’s trading just under 88 now. Expected close is Q4’17 which implies an upside of around 22% which seems pretty attractive. Downside I’m assuming is 10-15% since it was trading at 76-80 prior to the announcement and I’d be comfortable if the deal falls through owning this high quality company at this current valuation entry point.  If my math is right, market is pricing a 25-35% chance of the deal closing which seems very low to me (Why would AT&T pursue such a low probability event?). Risk/Reward looks pretty attractive.

 

Happy to hear everyone’s thoughts, and especially the bear cases. But it's def on my radar.

 

Thanks

 

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I took a quick glance at this one. Seems like a good arb play on surface:

 

1. Deal upside is 22%

2. Operating margins in the 24-25% range and have steadily climbed over 10 years. ROE 15-16%. And stable and quality brands and content (HBO, TNT, CNN) at current 17-18x P/E. Seems like a fair price.

3. Company aggressively repurchasing stock

 

The obvious risk is the government not approving. Also 50% of the currency would be in AT&T shares, and I know the telecom industry is going through an intense price war.

 

Need to do a further review though, but so far I like the odds.

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  • 2 weeks later...

So I'm guessing this one is down because of Trump's comments regarding not approving the merger? How many of you expect him to really care? He's surrounded by Wall St./hedge fund guys; I bet it still goes through. Seems like a good risk/reward.

 

It's barely down since election, so market doesn't seem to take that very seriously. Who knows, though?

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  • 1 year later...
  • 3 weeks later...

Is anyone still watching this? Wonder if it's gotten to the point of merger-arb fatigue. After a first glance:

1. The DoJ case doesn't seem to have much historical precedent, at least according to AT&T. I guess the concern is HBO could charge AT&T one price while charging Comcast another price?

2. Spread is fairly large (16%), although the government has asked for a May 7 court date

3. Underlying value of TWX seems in line with current price... trading at a slight discount to Disney at Fox, if those are the right comps and are valued correctly.

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  • 2 weeks later...

Is anyone still watching this? Wonder if it's gotten to the point of merger-arb fatigue. After a first glance:

1. The DoJ case doesn't seem to have much historical precedent, at least according to AT&T. I guess the concern is HBO could charge AT&T one price while charging Comcast another price?

2. Spread is fairly large (16%), although the government has asked for a May 7 court date

3. Underlying value of TWX seems in line with current price... trading at a slight discount to Disney at Fox, if those are the right comps and are valued correctly.

 

bought a little bit. I got flu a couple weeks ago when TWX is at 86ish. Hopefully it can go back there so I can buy more.

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  • 2 months later...

I think based on case laws, it will be quite difficult for justice dept to make their case. When Comcast bought CNBC, they sued too, and lost.

Interesting the current antitrust head was working for Comcast to lobby for the CNBC deal at that time.

Even if they win, the DiS/FoX deal and the earnings improvement  of TWX make twx cheap regardless.

I have about 10% weight in this position.

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