He decides, he appears, he speaks, he again rules out any future tilt at Time Warner … or does he? For the first time since the News of the World phone-hacking scandal erupted in July 2011, Rupert Murdoch joined a profit briefing in New York this morning. His message? Time Warner is off the agenda. 21st Century Fox has no other acquisitions planned.
While a disappointed Murdoch is keen to move on, Fox investors — still reeling from the collapse of the US$85 billion takeover bid that lasted under a month — are left doubting the company’s strategy.
Fox’s cash and shares bid for Time Warner was only pulled yesterday, and some media outlets (The New York Times and the Financial Times) pondered whether the withdrawal was strategic. Time Warner’s own stronger-than-expected June quarter results and a US$5 billion share buyback couldn’t stop its shares falling 12.5%, while Fox shares — which had dropped like a stone when the bid was announced — rallied 3.4% in relief that Murdoch would not repeat past errors and overpay.
Murdoch did his best to calm the horses, saying Fox had made a “resolute decision” to drop the bid for Time Warner, which was a “unique opportunity”. Fox was still an “amazing company” and, Murdoch reassured, “we know where we’re going”.
Fox chief operating officer Chase Carey hammered it home. “Let me be clear: we are done,” he said. But it was clear the decision was forced by Time Warner’s refusal to engage and — above all — the precipitous fall in Fox shares. “Too much of the value created in success went to Time Warner shareholders,” Carey said, and “the thought of issuing our stock at anything like current prices was untenable.”
The problem is, the bid was appealing. Analysts this morning lamented that HBO was indeed unique, “a premium network, with the potential to be an over-the-top global platform as well”. Fox, Netflix and Hulu just don’t have the same sex appeal, and Fox knows it. The disappointment was palpable in the voice of chief financial officer John Nallen, who briefly recapped the benefits of the Time Warner deal: “Scale does matter …we have a leadership position on scale, but [this deal] took it to another level.” Whether in sports rights, kids’ channels or general entertainment, there was a “real optionality that came out of the ability to mix and match the assets”. The two companies were “pretty good mirrors of each other”. And on it went.
“Everybody forgets it took Fox News seven years to make a profit. These days it makes a billion dollars a year. These things take time.”
Even after a US$6 billion buyback announced yesterday, Fox investors are left holding a company with a balance sheet swimming in cash after the restructure of Sky Europe. Nallen agreed Fox was “back where we were two years ago” — and earnings growth targets that look optimistic. Even Carey conceded Fox earnings projections into fiscal 2015 and 2016 had a “hockey stick curve to them”. Analysts asked how Fox would garner the ratings necessary to justify guidance on the high-single-digit earnings growth given today; just as it launches Fox Sports 1, the company faces the loss of Superbowl next year, leading to speculation it will bid strongly for the NBA. Carey played a straight bat.
Murdoch stepped in to reassure analysts: “If you look at all our best businesses, we’ve built them ourselves … Everybody forgets it took Fox News seven years to make a profit. These days it makes a billion dollars a year. These things take time.”
Murdoch, Carey and Nallen were grilled repeatedly by analysts who wanted to know if all acquisitions were off the table — the analysts were no doubt driven by the desire for more information, but the morning’s Financial Times revealed an even bigger motivator: the loss of an estimated US$420 million in fees for the various banks involved in advising and funding the US$85 a share Time Warner offer.
No matter what they say, Fox’s leadership now faces constant speculation about the next possible takeover. Murdoch himself said there were no plans to make another acquisition but did not rule it out: “If there was something very unique and small, I wouldn’t say never.”
Fox’s fourth-quarter results confirmed the company remains on a solid growth path — the company reported a net income of US$999 million, up from a US$371 million loss in the quarter last year. Revenues rose 16.8% to US$8.42 billion.
For the company’s 2013-14 financial year, Fox reported annual revenues of US$31.87 billion, up US$4.19 billion or 15% over 2012-13’s US$27.68 billion. Fox said its own version of operating profit (OIBDA, or operating income before depreciation and amortisation) of US$6.72 billion compared with US$6.26 billion in 2012-13:
“This 7% increase was driven by increased contributions from all of the Company’s segments, with more than half reflecting growth at the Company’s Cable Network Programming segment.”
And that’s the real story from the Fox result — the performance of the cable business — and confirms the belief that Murdoch makes more money for his family and shareholders from businesses he and the company have started.
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