21st Century Fox, a film and TV company controlled by Rupert Murdoch, offered to buy Time Warner last month for about $80 billion, a deal that would combine two of the largest players in the cable network business and possibly unleash a wave of consolidation among content producers.
Time Warner said in a statement that 21st Century offered a combination of 1.531 non-voting common stock shares and $32.42 in cash, but it determined that the deal "was not in the best interests of Time Warner." 21st Century Fox also confirmed its bid.
Shares of Time Warner soared 17% to $83.13 in morning trading Wednesday following an initial report by The New York Times that Murdoch offered the bid for the New York-based company that owns HBO, Turner Broadcasting System and Warner Bros.
"The Time Warner Board of Directors declined to pursue our proposal," said 21st Century in a statement. We are not currently in any discussions with Time Warner."
With content production cost surging, TV networks are looking for acquisition deals to boost their bargaining leverage against cable and satellite companies and sports leagues that are seeking higher payments. Fox pays the NFL a hefty sum to broadcast the league's games and, given the growing popularity of the sport, the next contract is anticipated to be significantly larger. Through its Turner division, Time Warner has close-ties with the NBA and its TNT network airs more NBA games than any other channel.
Murdoch's interest in sizing up comes amid a flurry of mergers by pay-TV providers whose profit margins have been hampered by higher fees they pay to cable networks for content and a growing base of cord-cutting consumers seeking better value in video by streaming online.
Earlier this year, Comcast agreed to pay $45 billion to buy Time Warner Cable -- a former unit of Time Warner that had been spun off as a separate company -- to combine the nation's two largest cable companies. AT&T also struck a $48.5 billion deal in May to buy DirecTV. Regulators are still reviewing the deals.
"The idea of consolidation should come as no surprise," wrote Michael Nathanson, an analyst at MoffettNathanson, in its blog Wednesday. "When one side of the bargaining table gets bigger the other side usually reacts. We just never thought that 21st Century Fox (or Disney or CBS) with their broadcast network and vast scale would the feel the need to react this soon, this aggressively and this big."
Time Warner also has a coveted asset in HBO, whose original shows are beloved by critics and fans but are expensive to produce. HBO's success drove Netflix to emulate the original-series approach by paying to produce at-Netflix-only shows. Netflix CEO Reed Hastings has repeatedly said his chief competitor is HBO.
Combining resources would also theoretically generate more savings by not having to run duplicative functions. But to get regulatory approval of any deal with Time Warner -- or with any other large network -- 21st Century Fox will likely have to shed some assets. CNBC reported that Fox planned to sell its CNN cable network to make the deal work.
Porter Bibb, a media analyst and former publisher of Rolling Stones, told Bloomberg Television that CNN would be spun off if Murdoch -- who is determined to push ahead despite the rejection -- can finalize an agreement. CNN would be valued at about $20 billion, he said.
In rejecting Murdoch's offer, Time Warner's board determined that executing its strategic plan will create "significantly more value for the company" and is superior to any proposal that 21st Century Fox "is in a position to offer," Time Warner said.
The board is also betting that the value of Time Warner's portfolio of networks, film studio and television production units will continue to increase and fetch higher offers, if the company is interested in merging later with another cable network operator.
"There is significant risk and uncertainty as to the valuation of Twenty-First Century Fox's non-voting stock and Twenty-First Century Fox's ability to govern and manage a combination of the size and scale" of the combined company," Time Warner said.
Convincing regulators to approve the merger of two large cable network owners would be a difficult and tricky proposition. Time Warner acknowledged the challenge, saying "there are considerable strategic, operational, and regulatory risks" to a merger with 21st Century Fox.