Monday, July 21, 2014

21st Century Fox-Time Warner: Round I

FoxA made a preliminary $80B hostile Bid for TWX. The bid was rejected on pricing grounds. The deal represents a $17B - 20% - premium over the pre-announcement price and 12.6X trailing EBITDA - neither of which is particularly rich. FoxA is willing to consider a higher bid once it gets access to TWX data. The deal is 60% cash and 40% nonvoting common FoxA shares. The Murdoch’s control Fox thru the 38% family ownership of the voting shares. The deal makes strong strategic sense - especially given the consolidation taking place in the industry. Initial estimates are of $1B in common synergies with the potential for $2B+ additional synergies to be confirmed upon due diligence once access to additional TWX records is granted.

The 60% debt financed cash component of the price is initially covered by a Goldman - JP Morgan $25B bridge acquisition loan, which will be subsequently termed out with long term debt. The post close capital structure will have a FD to EBITDA multiple approaching 5X. Large diversified media can tolerate higher debt levels than other industries given the historical stability of their cash flows. Nonetheless, this multiple is reaching the upper bounds of FoxA’s current Baa1 rating. The nonvoting status of the stock consideration is raising some questions concerning its valuation and governance issues. See Damodaran for a discussion of the valuation issues with nonvoting shares.

Ordinarily, corporate acquisition funding is rather straightforward - long-term debt and common. Here, there are funding constraints giving rise to interesting structuring questions. FoxA has limited additional debt capacity assuming it wants to maintain its Baa1 rating. Issuing more stock also has issues. First, TWX shareholders may have issues about nonvoting stock given the governance concerns associated with a family controlled business run by an 83 year old man. Second, the Murdoch’s are unlikely to issue voting shares which would dilute their voting control of Fox.

What will Fox do to fund the expected higher bid for TWX given these constraints? Some possibilities include some or all of the following subject to market availability:

1)     Sacrifice the Baa1 rating-dropping to Baa2 or Baa3. Rumor has it that the Murdochs are reluctant to take this action-at least for now.

2)     Issue voting shares. Probably a deal killer for Rupert and his sons.

3)     Issue more nonvoting shares to the public to reduce initial debt levels.

4)     Additional asset sales: antitrust issues will probably require some asset sales. TWX’s CNN is a potential candidate which could bring $8-10B. This only makes sense if the assets can be sold at a price exceeding their value to Fox. This depends on market conditions. Also, the sale of non TWX assets such as FoxA’s Sky unit could be used.

5)     Joint Venture-Partial Sale licensing arrangements.

6)     An Equity Carve-Out .

7)     Issue some sort of preferred stock. The nonvoting common is similar to preferred. The dividend rate and other features - e.g. cumulative and convertibility- need to be determined.

8)     Rights offering of the voting shares allowing the Murdochs to maintain their proportionate interests - assuming they are willing to invest.

9)     Assets securitization of contract receivables. Need to consider possible negative credit implications.

10)  Board Seats: consider offering TWX shareholders board representation as per Gabelli.

There are many open issues-competing bidders, antitrust, integration, Rupert’s age, 
succession plan, and governance issues. In any event, this promises to be an interesting structuring case.


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