By Soyoung Kim and Liana B. Baker
(Reuters) - Time Warner Inc's board, in rejecting 21st Century Fox Inc's $80 billion bid, insisted the offer undervalued the media conglomerate and raised fears about the dominating role that Rupert Murdoch's family would play, a person close to the situation said on Wednesday.
The board worried about the future value of Fox's shares, which represented 60 percent of the cash-and-stock proposal. Those fears were magnified by the lack of voting rights that would come with the shares, the source said, as that would concentrate too much power in the hands of Murdoch and his sons.
The board's misgivings suggest the 83-year-old Murdoch faces a long, bruising battle in his bid to remake the global media landscape by swallowing Time Warner.
"To do a merger of this scale and size where Time Warner shareholders have no insight into the destiny of the company is very troubling," the source, who was not authorized to speak on the record, told Reuters.
"Rupert is clear that he wants his sons to take over for him and that's a real risk for Time Warner shareholders," the person said, referring to James and Lachlan Murdoch.
The elder Murdoch's proposal, fresh on the heels of his high-profile divorce and a damaging phone-hacking scandal involving his British tabloids, is staggering even for a media mogul whose ambitions are legendary.
Time Warner, whose assets range from HBO to the Warner Bros movie studio, would offer Fox a sprawling portfolio of sports and entertainment content for global distribution, analysts say. A combination could also prove a formidable counterweight to the bulked-up distribution empires created by the proposed Comcast takeover of Time Warner Cable and AT&T's bid for DirectTV.
The acquisition, if ever completed, would mark the second-largest media deal ever, when debt is included, trailing only Time Warner's disastrous takeover of AOL in 2000.
In the end, a Time Warner deal may hinge on price. The source pointed out that Fox's stock is trading at the highest multiple of its peer group and Time Warner was trading at the lowest. Time Warner worries that the stock - the main "currency" of the deal - may be ripe for a pullback, lowering the value that is currently on the table.
According to StarMine, Fox shares trade at a multiple of 20.4 times 12-month forward earnings, above the group median of 17.8 and Time Warner's 16.6.
MURDOCH DETERMINED
Even so, Murdoch is unlikely to abandon the pursuit, people close to the situation said, pointing out that he has the "disciplined determination" to get a deal done.
In a sign that investors still see the company as a likely target, Time Warner's stock rose 17.1 percent to close at $83.13 in New York. Shares of Fox dropped 6.2 percent to $33.
The offer, first reported by The New York Times, was worth about $80 billion, or $85 a share, when it was made in June.
Fox estimates that a combined company, which would have $60 billion in annual revenue, would save $1 billion in costs and possibly more, the people familiar with the matter said.
Detailed negotiations with Time Warner could reveal even more potential savings, they said, which may then justify sweetening the offer.
Fox said no talks were currently under way, and it has no desire to go hostile or to bid against itself with a higher offer, the people familiar with the matter said.
Either way, a takeover by Fox could win the blessing of many of Time Warner's shareholders, a majority of whom also own Fox's non-voting stock.
Time Warner has no controlling shareholder, meaning the company could easily go into play, said Ken Griffin, founder and chief executive of Citadel Investments Group, which owns shares in both companies. "It's going to be tough to say no," he said during a conference in New York.
Mario Gabelli, chairman and CEO of Gamco Investors GBL.N, said he expects a technology company with more cash than 21st Century Fox, such as Apple or Amazon, could emerge with a bid.
"It's not a dynamic I want to dismiss out of hand. They have a currency, and they understand the value of content," he said of the tech companies." Gamco's funds own about 3.6 million shares of Time Warner and about 10.5 million Fox shares.
SEEKING DANCE PARTNERS
Fox's overtures are likely to reverberate across the industry, accelerating a wave of consolidation that is already well underway.
Comcast Corp, the largest U.S. cable provider, offered in February to buy Time Warner Cable Inc for $45.2 billion in stock. Overseas, Fox's 39 percent-owned British Sky Broadcasting Group Plc is negotiating to buy Fox's Sky Italia and its Sky Deutschland subsidiary in a deal that could net Fox as much as $13 billion.
As a consequence of the Murdoch bid, "the urgency to find a dance partner will increase across the sector," said Bernstein Research analyst Todd Juenger.
U.S. media shares closed higher on the deal, with top gainers including Discovery Communications Inc, up 6.3 percent; Viacom Inc, which rose 3.3 percent; and AMC Networks Inc, ending 4.5 percent higher.
Murdoch started thinking about a potential merger with Time Warner as he was separating 21 Century Fox, which mostly consists of media properties, from News Corp, focused on the Wall Street Journal and other publishing assets, people familiar with the company said.
The separation, triggered by the British phone-hacking scandal and completed a year ago, has positioned Fox to become a powerful consolidator of media properties, people familiar with the matter said.
Fox has indicated it would sell Time Warner's CNN cable channel, a direct competitor of Fox News, to clear any regulatory hurdles, according to the people.
At least one antitrust expert, who was not authorized to speak publicly, said it was unlikely that any issues that arise would kill a Fox deal for Time Warner. The source pointed out that there were currently five major content companies in the United States, plus numerous smaller ones.
News of the Time Warner bid comes as Fox is reorganizing its television business, aiming to lift its network out of last place among the big U.S. broadcasters.
Fox is being advised by Goldman Sachs GS.N and Centerview Partners, while Time Warner is working with Citigroup, people familiar with the matter said.
Skadden, Arps, Slate, Meagher & Flom is providing legal advice to Fox, while Cravath, Swaine & Moore is legal adviser to Time Warner.
(Additional reporting by Soham Chatterjee in Bangalore, Luciana Lopez in New York and Diane Bartz in Washington; Writing by Frank McGurty; Editing by Saumyadeb Chakrabarty and Lisa Von Ahn)
