Ross Kerber Boston

To clinch a deal to buy Time Warner, Rupert Murdoch’s 21st Century Fox would not only need to raise the value of its bid above $80 billion (R855bn) but boost its ratio of cash to stock, investors said yesterday.

Time Warner said it had rejected Murdoch’s unsolicited offer, of which 60 percent would be 21st Century Fox stock and 40 percent cash. The far-reaching proposal would reshape the US media landscape.

A number of Time Warner shareholders said Fox and Murdoch, its chairman and chief executive, might have to raise the bid to as much as $95 a share and boost its cash component to wrap up a merger. Murdoch offered about $85 a share when the bid was made last month.

“Rupert has got to figure out a way to get more cash in the deal,” Gamco Investors chief executive Mario Gabelli said.

Gamco’s funds own about 3.6 million Time Warner shares. Like many other shareholders, Gamco also owns stock in Murdoch’s company – about 10.5 million shares – and Gabelli said some of his investors were not eager to increase the number of those shares as part of a merger.

Another executive at one of Time Warner’s large institutional shareholders also said he would look for Murdoch to offer a higher ratio of cash to firm up the value of the deal.

Prospects for gains in Fox stock in the near term could be constrained by the difficulties of merging the two businesses, including wringing out cost savings, and the effect of the likely debt burden Fox would assume after borrowing billions of dollars.

“Cash is cash, so you know exactly what the value is,” the person said. Even though the executive, who spoke on condition of anonymity because of company policy, said he thought the overall value of the proposed deal was fair, Murdoch could still raise his bid.

“It’s a corporate poker game for sure, and Murdoch never plays his best card first.”

Time Warner shares rose 17 percent to $83.13 on Wednesday, after the company disclosed the offer and its rejection. Including the assumption of Time Warner debt, the deal would have been worth $94.3bn, according to Thomson Reuters data. 21st Century Fox shares fell 6 percent to $33 on the day.

Time Warner said the strength of its own strategy and “significant risk and uncertainty as to the valuation” of Fox’s stock were reasons for rejecting the bid. It also noted the stock did not have voting rights, a type of share that typically trades at a discount.

Spokesmen for Time Warner and Fox declined to comment.

Mitch Zacks at Zacks Investment Management of Chicago said Time Warner’s board might have rejected the offer as a bargaining tactic. “My guess is that if the offer goes to about $95 a share, the board would have a hard time turning it down.”

Zacks declined to discuss exactly what price he would accept to sell his own shares. He said his firm had about 192 000 Time Warner shares and none of 21st Century Fox.

Zacks also noted low interest rates made it easy for companies to finance borrowing but that stock prices were at all-time highs, creating currency for deals and helping drive a mergers and acquisition boom.

A high stock price could be tempting Murdoch’s company to prefer stock than cash as its currency.

Shawn Narancich, an executive vice-president at Ferguson Wellman Capital Management, said with Wednesday’s price run-up, Time Warner traded in line with some competitors, at about 20 times the estimated earnings for this year..

Time Warner’s growth projections could justify its rejection of the original offer, he said. – Reuters