Time Warner Shareholder Returns Confront Bewkes With Growth Test

Aug 13, 2014 12:00 am ET

Aug. 13 (Bloomberg) -- Rupert Murdoch was deterred in his effort to buy Time Warner Inc. by an obstinate Jeff Bewkes, who said his company was better off on its own.

The numbers show Time Warner Chief Executive Officer Bewkes does have a better record than Murdoch’s 21st Century Fox Inc. of squeezing profit from each dollar of sales. Operating margins at the owner of HBO and Warner Bros. have averaged 23 percent the past eight quarters, versus 18 percent for Fox, according to data compiled by Bloomberg. Murdoch, in turn, has generated a higher return from stockholders’ money: Fox’s return on common equity averaged 21 percent; Time Warner’s was 12 percent.

The contrast illustrates the challenge facing Bewkes as he seeks to prove Time Warner’s value without a mega-merger like the $85-a-share takeover bid Fox withdrew on Aug. 5 -- a move that sent his stock down 13 percent. Bewkes, 62, has slimmed down Time Warner by spinning off cable systems, AOL Inc. and Time Inc. since taking over as CEO in 2008, and now has to demonstrate he can generate growth. Murdoch, who has shaken markets as a dealmaker, has created major assets like Fox News and the Fox broadcast network from scratch.

“Warner Bros. has had the best film and TV management and studio in Hollywood for decades,” said Alan Gould, an analyst with Evercore Partners in New York. “Fox has done a better job at the cable network side, in particular its growing and building new networks.”

Bewkes, a no-nonsense executive with a gravelly voice and wry sense of humor, has revitalized Time Warner by winnowing down the bloated business into a pure video entertainment company, generating returns for shareholders.

Share Gains

Even before Murdoch’s offer jolted Time Warner upward last month, the New York-based media company had produced a 114 percent return for investors since Bewkes became CEO, more than Fox’s 90 percent, according to data compiled by Bloomberg. Dividend payments and spinoffs boosted the return for both companies’ investors, and each outpaced the Standard & Poor’s 500 index, which climbed 36 percent in the same span.

While his efforts to whittle down the company to its most prized entertainment assets have increased the value of the business, they’ve also potentially made it harder for Bewkes to boost revenue at a rapid clip.

Time Warner’s average return on capital -- a popular measure investors use to evaluate management’s efficiency at generating profit from its capital investments -- was 8.9 percent the past eight quarters, lagging behind Fox’s 13.8 percent, according to data compiled by Bloomberg.

Keith Cocozza, a spokesman for Time Warner, declined to comment, as did Dan Berger, a spokesman for Fox.

‘Anti-Murdoch’

“Bewkes is a technocrat manager. That’s not a horrible thing to be,” said Michael Wolff, author of “The Man Who Owns the News: Inside the Secret World of Rupert Murdoch.” “Bewkes would style himself as an anti-Murdoch.”

Both companies have undergone recent structural changes. Murdoch, 83, cleaved entertainment at Fox from the News Corp. publishing business last year, and more recently agreed to sell his Italian and German satellite assets. In June, Bewkes spun off the Time Inc. magazine division. The companies that remain have a similar set of film and television assets -- one reason Murdoch sought to combine them.

Now each must prove they can grow organically. Analysts lowered their profit forecasts for both Fox and Time Warner after they reported earnings last week. Both companies will be investing in their cable networks to spur growth -- Time Warner at HBO and the Turner networks, TNT and TBS, and Fox in its new Fox Sports 1, as well as internationally, especially in India.

M&A Risks

Some of Murdoch’s mergers have turned out poorly for shareholders. He paid $580 million for MySpace parent Intermix Media in 2005, selling the website for a fraction of that in 2011. Dow Jones & Co., owner of the Wall Street Journal, commanded $5.5 billion from Murdoch and his shareholders in 2007, when newspaper values were shrinking.

When it comes to corporate culture, the two couldn’t be more different. Fox is family controlled and evinces the sensibility of its entrepreneurial billionaire CEO. Time Warner has a single class of stock, and has roots in New York and Hollywood media circles that were used to lavish expense accounts before Bewkes clamped down.

Bewkes may see the potential to sell to Murdoch at a higher price later, according to author Wolff.

“He’s waiting for Murdoch to overpay,” Wolff said.

‘Acquisition Trail’

Investor concern about Murdoch’s restraint helped doom the Time Warner proposal. While the bid was active and public, shares of New York-based Fox declined 11 percent. The stock advanced 1 percent to $35.11 yesterday, just below where it stood, at $35.19, before the bid for Time Warner became public.

Murdoch, who is chairman and CEO, and co-Chief Operating Officer Chase Carey used last week’s earnings conference call to say they wouldn’t renew their pursuit of Time Warner. They said they weren’t looking for other content deals and are happy with a 39 percent stake in the U.K.’s British Sky Broadcasting Group Plc.

“We are a strategically complete company and have a clear sense of where we are going,” Murdoch said on the call. “If there was something very unique but small, I don’t know. I wouldn’t say never but we have no plans to go out on the acquisition trail.”

Time Warner, also based in New York, surged 20 percent while the bid was active and public. Yesterday, the stock declined 1.4 percent to $73.04 at the close in New York.

NBA Rights

Bewkes’s growth strategy rests on expanding HBO, home to “Game of Thrones,” and negotiating healthy increases for the licensing fees that cable and satellite companies pay to carry Time Warner’s sought-after shows and the sports programming that are ratings gold mines for the Turner networks.

Bewkes can boost his chances for success if he’s able to renegotiate a deal to carry National Basketball Association games. That will come at a price, as the NBA is said to be seeking to double its fees with the new deal. Fox could come up as a competitor, as it looks for programming for Fox Sports 1.

On the company’s earnings call last week, Bewkes said he didn’t want to talk about Murdoch or his bid. Instead, he stayed on message, pitching the successes and growth story of HBO and the Turner cable networks.

“People underestimate the opportunity we have, in terms of reinvigorating our key Turner networks and in capitalizing on the under-monetized opportunities that exist there,” Bewkes said on the call. At HBO, “we’re seeing really strong increased demand for the services and the content.”

HBO, Turner

Time Warner’s second-quarter profit beat analysts’ estimates. Bewkes stressed the growth potential of Turner and HBO in foreign markets and the appeal of Cartoon Network among children outside the U.S. Those markets are becoming more crucial to programmers like Time Warner as the number of U.S. pay-TV customers peaks.

Fox beat estimates, too. The film studio produced record profit with hits like “X-Men: Days of Future Past” and “Rio 2,” and the addition of the YES Network helped to overcome a tough climate for cable ads. At Fox Broadcasting, revenue and profit fell as the network struggled to develop hits to succeed the fading “American Idol.”

Murdoch can argue he has better growth prospects. Time Warner is projected to have sales of $34.4 billion in 2018, 15 percent higher than last year, based on an average estimate of analysts compiled by Bloomberg. Fox is projected to increase sales by 19 percent to $37.8 billion over the next five years.

“We feel great about the future of 21st Century Fox,” Murdoch said on the call, citing the company’s leading franchises, emerging businesses and international clout. “Our confidence in our future made the thought of issuing our stock anywhere near its current price simply untenable.”

--With assistance from Edmund Lee, Shin Pei and Sarah Rabil in New York and Jason Frentzel in Skillman, New Jersey.