Twenty-First Century Fox’s bid for Time Warner could be just the opening salvo in a bidding process that would involve a higher or even other bidders, Moody’s Investors Service says in a new report, “Twenty-First Century Fox’s Bid for Time Warner: The Credit Impact Acquisition Scenarios.”
Time Warner has announced that Twenty-First Century Fox made an unsolicited bid last month to acquire the company for about $76 billion in a combination of nonvoting shares and cash. Time Warner rejected the proposal.
“We think Time Warner’s announcement puts the company in play,” says Moody’s Senior Vice President, Neil Begley. “While a deal is still uncertain, Time Warner management could make a strong case for a higher valuation or independence, pointing to intermediate-term earnings growth opportunities.”
Time Warner is an attractive takeover candidate, Begley says, given its market leadership in content creation, global distribution capacity, No. 1 premium pay-TV service HBO, valuable cable networks and strong balance sheet. A deal would fill no obvious strategic gaps for Fox, but HBO would be a prize for the company, which would become an unmatched power player in film and TV production and cable networks.
Fox may be able to keep its Baa1 credit rating, even if it sweetened its offer, Moody’s says. A review of the leverage parameters outlined for its rating would be warranted given the combined entity’s increased scale and diversity and enhanced cash flow, even if leverage were to slightly or temporarily surpass the current rating downgrade trigger threshold.
“A deal under which bondholders get the benefit of Fox and Time Warner’s strong balance sheets and robust cash flow generation capabilities, and the companies’ operations and debt capital structures are legally consolidated, would likely result in a Baa1 or Baa2 rating,” Begley says. “The company could sell material assets, reduce overlapping costs by billions, reduce share repurchases and dividends and apply free cash flow to debt reduction to avoid a downgrade. But if Fox were to use debt more aggressively to raise its offer, a Baa3 rating is possible, but we believe less likely given Fox’s conservative history.”
But Fox may not be the only party interested in Time Warner. The bid could prompt other offers, even from technology giants such as Google and Apple. If a tech company were the purchaser, digital innovators could gain access to content and drive more rapid change in the digital and mobile worlds.