Will Time Warner Make A Bold Move?

twx

Headline:
“The Hunted” May Become “The Hunter”

It was a little over two years ago that Rupert Murdoch’s Twenty First Century Fox [FOXA] proposed a buyout of Time Warner [TWX].

just-rupertNaturally TWX stock soared on news of the proposal, but FOXA shares tanked, as Rupert Murdoch’s penchant for over-paying [i.e. Dow Jones] was an immediate concern [see below chart].

super-finalFurthermore, the stock + cash deal included a meaningful detail beyond the murky value. That is, the FOXA shares [to be used as equity currency] were non-voting. So, if a deal were to be completed, TWX shareholders would have no voice in the combined companies affairs.

Adios Rupert” was the blunt message from TWX’s Board of Directors.  A harsh reference to a lack of confidence in FOXA’s management team to effectively steer the combined enterprise was also communicated [see below]:

“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 Twenty-First Century Fox and Time Warner;”

************************************************************

Murdoch, obliged the message from TWX, and quickly [19 days] “cut and ran”.  Concern that a deal could only be achieved with significant earnings dilution overwhelmed any longer term strategic value.

In the past a disregard for shareholders would not have deterred Murdoch but he had obviously reached too far with TWX…spending the majority of his financial payload on his first/only bid.  Stretching further probably would have risked the credit ratings.

Surprising many, not only did Murdoch drop the bid, he initiated a multi-year share repurchase program…that over two + years morphed to an impressive $9B.

A manic, but welcomed, flip-flop for FOXA shareholders.  But manic once…likely to be manic again…which is a serial concern for all FOX stakeholders.

************************************************************

And to be sure…there was no way that TWX, with its legacy of strong business’, would EVER sell-out to “relative” upstart Murdoch…not to say that the FOX asset base is not attractive.

It absolutely is…but it is being managed by an unproven senior level executive team…that is, Murdoch’s two “forty-something” sons.

How far from the tree have these two apples fallen?  Apparently not too far as the boys immediately called daddy back into the office, to help manage the cable news division, after the Ailes sexual harassment scandal.

This helps to explain the “2-turn” EBITDA discount  [ex: SKY valuation] to its peers.

Investors seeking a clean break from daddy, and his company’s material/ethical gaffe’s [i.e. The News of The World], were disappointed at the boys recent failure to demonstrate their independence.

bros

To be fair Murdoch’s progeny, in time, may overcome this discounted financial metric if they are both quantitatively prudent + qualitatively credible.  But existing shareholders are not too keen on the phrase “in time“.  For them the time = NOW…not the future.

And, ironically, NOW may be the time for TWX to acquire FOX…as both the data below and price chart above illustrate.

The market is offering [via much superior EV & EBITDA valuations to FOX] TWX management the opportunity to make a strategically bold move.  In this iteration, however, majority voting control of the combined enterprise would tilt toward the more highly regarded TWX executive team.

************************************************************

July 2014

Equity Cap + Net Debt = Enterprise Value [EV]

FOXA: 79.09 + 13.64 = 92.73
TWX: 75.25 + 15.42 = 90.67 [2.27% DISCOUNT TO FOX]

Sept 2016

Equity Cap + Net Debt = Enterprise Value [EV]

FOXA: 44.48 + 15.93 = 60.41
TWX: 62.01 + 19.33 = 81.34 [34.64% PREMIUM TO FOX]

************************************************************

Is TWX  management actually tempted to acquire FOX?  Maybe…Maybe Not.  But TWX CEO Bewkes must, at least, be considering it…he may even be salivating over the possibility.

An opportunity to swipe Murdoch’s precious media gem, with Wall Street’s valuation endorsement, after Fox’s  unsolicited/unsuccessful bid…that may be too good to “pass up”.

Recall that Murdoch was proposing a merging of assets but not of senior management. The non-voting equity portion, of the prior bid, was effectively a “persona non grata” to TWX executive management.  The not so subtle insult is, likely, still not forgotten by Bewkes.

bewkes************************************************************

Nevertheless a deal only gets done if FOX acquiesces …given Murdoch’s stranglehold over FOX’s voting rights.

But that does not necessarily mean that a deal cannot occur.

It simply requires a fair amount of legal bribery [in the form of a richly valued offer …which TWX can clearly afford]. FOXA [non-voting] shareholders can then use the offer as a stump to argue their case to Mr. Murdoch…given the massive under-performance of the equity over the past 24 months [versus the S&P 500 too].

spy-foxaEven then Murdoch has the legal right to JUST SAY NO. However, FOX’s Board of Directors does have an obligation to examine any legitimate offer.  And an offer from TWX would definitely qualify as legitimate…especially since Murdoch attempted to piece together the two companies just 26 months ago.

It is interesting to note, also, that activist investor Jeff Ubben of ValueAct now sits on Fox’s board [unlike two years ago]…while his firm owns, at least, 47.3M shares…currently valued at just over $1B. The cost basis, though, appears to be much higher. You think he wouldn’t be interested in striking a deal?

ubbenFinally, there is no possible scenario [other than unwarranted bravado] where FOX can financially rationalize a defensive “Pac-Man” re-acquisition attempt. It’s equity is trading at/near a 52 week low and its EV [Enterprise Value] = 25.73% less than TWX’s….and as previously mentioned…two full turns lower EV/EBITDA multiple.

So it is not as easy of a “slam dunk” NO for Murdoch as it initially appears to be.

************************************************************

Moreover, the strategic rationale for a business combination between these two companies is even stronger than it was, two years prior, as the global media landscape  evolves with even greater opportunities and challenges…particularly for these two premier content providers.

To start off, the synergies between the two film studios [20th Century Fox + Warner Brothers] and cable operations [primarily Fox News + CNN] are considerable while the negotiating clout [with global distributors], due to the aggregated content density, would be tough to counter.

Plus, the non-overlapping businesses [TWX’s HBO/Cinemax + FOX’s international operations Sky Europe/Star India] could immediately lever each other.

FOX’s domestic television network  content could also recycle its content on TWX’s Turner assets [TNT/TBS].

The network/cable sports combination [domestic + international] would be newly formidable…severely narrowing the gap versus Disney’s ESPN.

************************************************************

Over the years both companies have smartly shed non-core assets to focus on video content creation as TWX divested Time Inc’s magazine assets + Time Warner Cable while FOXA spun off it’s slower growth newspaper and book publishing assets etc. into News Corp [NWS].

Also, the combined company would immediately match Disney’s [DIS] $58B in annual revenues and actually exceed it in EV.  And, in this particular business, BIGGER = BETTER as the global market opportunity requires substantial capital.

Financially, aggregated annual EBITDA [before synergies] > $14B.   And both firm’s are already FCF positive with investment grade credit ratings.

************************************************************

Although it might be difficult to envision Murdoch completely selling out to TWX he might be willing to cede some control…given the successor powerhouse company that could immediately be created…rather than slowly grinding, potentially, toward that same goal…so far into future that it would likely exceed this octogenarian’s life span.

Obviously, the EGOS = HUGE…on both sides of this entertainment equation.  But what better than creating the globe’s most influential  entertainment + televised news conglomerate?

Talented managers, from both companies, would likely stay engaged as the volume of current work + future opportunity = MASSIVE.

And together, considering the muscular financial structure, the company would be primed to become even more dominant.  It would be extremely difficult to effectively compete against this new media juggernaut…the moat around the business would be especially wide + deep.

************************************************************

Of late, though, the business at FOX has only been adequate …far from stellar.

The movie studio performance has softened [although management changes are in motion] while the television network has moderately plateaued.

Investment dollars continue to flow into National Geographic + Star India while Europe’s Sky has been penalized by a weakened British pound.

The cash cow cable news division has rapidly grown revenues but costs have recently outpaced and CFO Nallen is unapologetic about all of it…while also guiding to a higher and more normalized tax rate resulting in a cautious near term outlook.  His bullish medium/long term views, however, are not supported by any financial targets.

************************************************************

Recently FOX did not aggressively pursue CVC Capital’s prized stake in Formula One…losing out to one of John Malone’s Liberty subsidiaries despite a surprisingly reasonable price.

Lachlan Murdoch also indicated, at an investment conference, that the company was not interested in acquiring any Viacom’s assets…if, in fact, some were offered for sale…as VIAB struggles to reconfigure its debt heavy balance sheet.

So for the time being, this self-described growth company, seems to be overly focused on its organic prospects that are barely inspiring while stepping back from even lesser “bolt-on” acquisitions and, oddly…management seems almost proud of its cautious proclamations.

************************************************************

Despite the shorter term operational issues FOX recently ramped the dividend by 25%.  Incrementally, though, this represents a mere $117M per/year very thinly spread across 1.95B shares outstanding [or just less than twice the recent $60M in combined settlements with former senior executive Roger Ailes and on-air personality Margaret Carlson].

Additionally, the average price of the re-purchased shares for the past fiscal year = $28.95 [17.78% greater than the most recently traded market price].  The repurchases in the prior year occurred at an even higher price.  Yet the $3B authorized for additional repurchases has yet to be released for execution.

This stubborn approach to treasury operations does not sit well with shareholders that have endured a 40.59% price decline in a little under two full years [Dec ’14 – Sept ’15]… and is mightily counter-intuitive [as in…Buy High + Pause Low].

************************************************************

So, in spite of producing > $7B EBITDA annually + size-able Free Cash Flow it appears the company is clinging tightly to its purse.

FOX’s current operational strategy is not so different than a company “putting out the scent” to a potential business partner.

Its distilled focus on stable [+/-] core operations + not taking on too much new business/treasury risk, while its stock sags, might offer a tempting opportunity to a more aggressively minded company…such as TWX?

A Day Of Pride For Agrium & A Day Of Shame For Potash Corp

agrium potash

Headline:
Agrium Has All Of The Negotiating Leverage In Potential Deal With Potash Corp.

The all too frequent miscues and misfires of Potash Corp’s [POT] executive ranks, since 2008, have come into focus today with the disclosure of a potential “merger of equals” with Agrium [AGU].

The equity values may equate at $12B [prior to the leaked deal talks earlier today] but management’s acumen has been anything but equal as AGU’s bifurcated strategy of retail + wholesale has proven far superior to POT’s patient, and ineffective, commercial approach.

It is clear, from the monthly price chart below, that AGU has weathered this miserable agricultural nutrient market with a much better company plan and executed strategy [especially since 2012].

better pot chart

So much so that its equity currency has much greater relative value than POT’s. And with a stronger currency comes all of the negotiating leverage. This deal ONLY happens if AGU wishes for it to happen. POT shareholders, after years of misery, will only receive the crumbs they are allocated from AGU’s Board of Directors.

*********************************************

Furthermore, I am not so sure why AGU would wish to acquire POT…other than trying to acquire assets near a potential market trough…which makes some sense…especially as they expand their retail market in the U.S. And it is important to note that both companies traffic in the Big 3 agricultural nutrients.

But just because the NP&K markets may be bottoming does not mean they are primed to move straight up. There is still much excess capacity to absorb…particularly in N [nitrogen].

CF Industries [CF], North America’s largest producer of nitrogen, CEO Tony Will recently stated that he does not expect a sustainable price recovery until calendar 2018. And both K [potash] P[Phosphate] are still exceptionally well supplied. Plus, recent mine/supply supply cutbacks can easily be restarted and there are also a couple of newer mines.

Since peaking in 2008/2009 prices for all three nutrients have severely, and consistently, moved “down and to the right.”

fertilizer prices 

And, to be sure, agricultural nutrient market pricing is primarily driven by agricultural product pricing. In the U.S. and Canada that is primarily corn, wheat and soybeans [all of which have tanked in recent years] while overseas demand for nutrients has been anything but starched as the strong dollar weakens “local” purchasing power for imported nutrients + increases the incentive to maximize export volumes [since most transactions are conducted in $US].

Moreover, although not regularly reported, China [the source of so much potash demand from 2000 – 2010] is also developing their own mines towards a stated goal of 75% self-sufficiency.

Add to that India’s large demand/import cutbacks + Uralkali/Belaruskali’s business strategy of maximizing supply versus price [which has proven to be much more successful than anticipated] = miserably priced potash.

It is just “a mess”…the kind of a “mess” that could indicate a market bottom.

*********************************************

Still, POT’s many mis-steps, since those heady days of 2008, have been self-inflicted…leading to their current conundrum under ineffective CEO Jochen Tilk and his blunt/optimistic predecessor Bill Doyle.

tilk doyle

Despite insisting to the contrary Tilk has twice cut the dividend in just the past twelve months …while maintaining a steadfast belief [like his predecessor] that a pricing rebound is nigh. His credibility is “shot”…and AGU is well aware of it…hence the corporate pursuit.

POT, under Doyle, also rebuffed Australia’s BHP size-able offer for the company in the summer of 2010 [see above price chart]. In retrospect, POT’s Board of Director’s [under political pressure from the province of Saskatchewan] made a HUGE economic mistake to reject the substantial $39B BHP offer [225% higher than POT’s value earlier today prior to the Bloomberg deal chatter].

Since then the global fertilizer sector has been in the tank and POT, despite it’s stellar mines and operating proficiency, has also suffered.

And, not happy with being rejected, giant BHP has [unfortunately for their shareholders] squandered over $2B preparing the massive Jansen mine…also located in Saskatchewan [solely, and impressively, capable of increasing annual global production by a staggering 15%]…though it is likely to be shelved, and put into “care and maintenance”, in the near future.

Hence, earnings and cash flow for POT have naturally lagged and the balance sheet has weakened. In the meantime POT’s equity interests in other global nutrient providers [Israeli Chemicals, Arab Potash and Sociedad Quimica Minera] curiously remain “un-monetized”…and, more importantly, un-productive.

An unsuccessful bid for Israeli Chemicals, in 2012/2013, was yet another failure.

And, of course, Tilk could not even succeed in over-paying for K+S of Germany. POT’s strategy of attempting to acquire an entire company, in order to gain control of a pivotal potash mine [Legacy] in their Canadian backyard, was lucky to fail. The price offered was much too rich and the German company was unwise to reject it.

*********************************************

Now the hunter[POT] is being hunted [AGU] as the Calgary based company is in the proverbial “drivers seat” [thanks to a successful “stiff arm” to activist hedge fund JANA Partners…and their flawed attempt to split AGU’s wholesale + retail divisions, in 2012/2013, into two separate public entities].

Former CEO Mike Wilson’s forceful efforts to repel JANA must now be heartily applauded as the retail division has offset substantial weaknesses [but still profitable] at the wholesale division.

better wison

jana

So do not be fooled that this POTENTIAL combination = A MERGER OF EQUALS. It surely is not…despite the PR spin and headline mathematics. AGU is clearly on the hunt for very vulnerable corporate prey.

This Idea That Overseas Manufacturing Jobs Will Be Returning To The USA = Pure Fantasy

hillary donny t

Headline:
Both Political Candidates Demonstrate Economic Ignorance While Pandering For Votes

As we enter the final lap of the presidential race in the United States, as always, the two candidates will say just about anything to secure your vote. And of course the economy is a major topic of conversation. Loud calls for both higher wages and more jobs dominate the rhetoric.

Naturally, Hillary C. [the ultimate political insider/scumbag] and Donny T. [the idiot billionaire aka “The Trump-Tanic”] claim they can easily solve both of these problems. I can only laugh at their certitude. They are so wrong…and like true political animals…they probably know it.

But promises will get you elected in the U.S. even if you cannot follow through, and execute, on them. Still…just in case they are both as intellectually obtuse as they appear to be…they may want to consider the following.

**************************************************

First of all the exodus of U.S. jobs to overseas domains is primarily focused in the manufacturing sector. The uncomfortable fact = overseas labor is much cheaper than in the U.S. How come? Because many of these jobs do NOT require a high degree of skill and formal education…not to suggest that these jobs are easy to perform. But these skills can be taught to overseas labor with minimal effort/capital versus the potential returns on investment.

mfg

And in the manufacturing economy the labor component = typically the highest cost segment. Unfortunately, for the American manufacturing worker, overseas laborers will perform their same job at a significantly lower wage. Plus, sorry to say, the quality of work is effectively equivalent…but not always.

Anyway…think about it. For an American company, in most cases, it is cheaper to construct a product overseas [i.e. Nike sneakers]…even after a company constructs/rents a manufacturing facility, “tools” the facility, pays labor costs [which in some cases include housing] and then transports the product back to the USA. Not only is the labor cheaper…but MASSIVELY cheaper.

As a friend of mine, with a dubious talent for salty/crude language, once told me years ago “…they are paying fetus’ chained to a sewing machine about $1.00 per/day.  No way we can compete.” Regrettably, he is correct [although likely more than $1 per/day with improved conditions in 2016].

**************************************************

Given these facts how will any of these jobs ever be repatriated?  The ONLY answer = when the level of manufacturing wages in the U.S. = the cost of production in these emerging countries [labor + production + transportation back to the USA].

IT AIN’T HAPPENING ANYTIME SOON…IF EVER.

**************************************************

So how do both of the U.S. candidates for president rationalize their arguments to bring back American job…that is…the day after one of these knuckleheads is elected…against this stark/bleak manufacturing reality?

Basically, Donny T. wants to tax overseas production at the U.S. border…which sounds good but is economic suicide as it is both inflationary and protectionist.  He clearly did not receive the memo on economic globalization.

As for Hillary C. I am not aware of any strategy other than her sheer desire to increase manufacturing employment.  But when these jobs do somehow magically return [which they won’t] she proposes an increase in wages which sounds good…but only makes the U.S. increasingly non-competitive with the rest of the world.

Clearly…both candidates policies are intellectually hollow and poorly designed…almost comical in their seriously flawed simplicity.

Of course their ideas won’t work and, if anything, will weaken America’s global economic strength.  Thanks for the effort…I think…but NO THANKS.  Please…Just Go Kiss More Babies.

**************************************************

However what both of these flawed candidates do seem to understand = this exportation/disruption of non-essential [anything but defense] U.S. manufacturing creates a lot of economic hurt in the U.S.  And this is brutally unfortunate for many of America’s hardest workers…but this trend is not going to change anytime soon.

Just because you live/work in the U.S. does NOT entitle you to an artificially inflated wage vis-a-vis the rest of the world.  Plus…blaming the, lower wage accepting, overseas worker for America’s labor issues is frankly…a very stupid argument.  And the global economy, in the future, will only become more connected and ruthlessly efficient.

Politicians like Hillary C. and Donny T. can either continue to whine and complain about this cost driven manufacturing job exodus or try to focus on somehow preserving the dwindling number of current American manufacturing jobs [actually, in many cases, it is pure assembly of overseas manufactured parts…yet classified as manufacturing]  or examine the benefits of overseas production.

Benefits? Yes.

The primary benefit of overseas production is that it drives down inflation…that is the price of many goods at the cash register.  We all like that…Right?

The real question that is rarely asked =  Is the average domestic consumer prepared to pay more for a product, of equivalent quality, if it is manufactured in the U.S. versus overseas.  In many cases the answer is YES…but how much more money are we willing to pay?

Will the average consumer pay $300.00 for a pair of basic NIKE running shoes or $1000.00 for an iPhone because it is manufactured in the U.S.?  I doubt it.

Basically, at these inflated prices, American consumers are likely unwilling to subsidize American labor…no matter how many “Proudly Made In The USA” placards/tags are displayed.  BTW…I hope these placards/tags are actually manufactured  in Americ’er?

usa

Another less direct benefit of overseas manufacturing = improved sovereign relations.

Like it or not part of this country’s job is to promote democracy and capitalism throughout the globe although many American tactics employed to support this mantra run counter to the U.S’s cornerstone ideals i.e. re-establishing a sliver of a relationship with Iran.

And what better than an ignition, of an emerging economy,  from the world’s most powerful economy…and along the way the USA  promotes it’s altruistic message/vision?

Plus…democracy is still the best global political structure “going” even though it produces two lousy presidential candidates like Hillary C. and Donny T. Maybe this election cycle is just an aberration?  I certainly hope so.

**************************************************

So…back to manufacturing employment.  Has the U.S. permanently lost its edge in production and its techniques?  The short answer = Absolutely Not.  When necessary…this country can produce whatever it wants…whenever it wants…better than any other country…and this is not even worthy of a brief debate.

But for now…the U.S. does not wish to produce.  It just does not make current economic sense.  But perhaps in the future…or is the future right now?

You see many of those overseas manufacturing jobs, that were exported, will eventually be replaced by ROBOTS…as many already have…and so many more will be in the not so distant future.

Sort of like The Jetson’s weekend morning show from long ago. As a child it was an animated fantasy but in the year 2016, and forward, it is a BIG AND TRUE REALITY with significant global economic impact…as in a lot less human labor required.

The companies driving/developing these technologies…so many are logically American…and they are very talented at it too…and will only get better.

And have you noticed that it is already here…practically applied in many industries?  You might want to take a look at your weekly garbage trucks. The trash bins are picked up and dumped utilizing robotic arms.  No more 2-3 dudes hanging on to the truck’s rear handrails.  Some still operate that way…like in Manhattan…but not for too much longer.

robotic arms

So robotics are coming and they are not just cost efficient [after the initial capital outlay] and tireless.  They also don’t complain about long hours, call in sick or go on strike for higher wages and more benefits.

It is such an easy sell to global corporate CEO’s and bean counters beholden to their stakeholders.  Human participants, in the global manufacturing process, are such a SHORT.

**************************************************

So maybe the collective U.S. strategy [I think it was intended but maybe it can simply be assigned to unintended capitalistic consequences] about manufacturing is not as flawed as both Hillary C. and Donny T. claim.  Rather, it could be classified as leading-edge?

Perhaps the politicians just don’t see it? Or maybe their pollster’s have told them that all this whining/complaining will lead to more incremental votes in a crucial voting demographic…resulting in a 4 year residency at the White House?

Because…really…for all their jawboning about issues that effect almost everybody…this election is simply about their personal/ultimate goal to become the most powerful person on this planet.  Nothing more than that…their promises on the campaign trail will quickly be mentally shredded once the final November votes are tallied.

better politician

And for those political idealists that may believe otherwise…that is also PURE FANTASY.

Monsanto Signals Continued Willingness To Deal

index

Headline:
This Portion of Today’s Earnings Release Will Continue To Fan The Speculative Flames

Monsanto CEO Hugh Grant:
“While there is no formal update on the Bayer proposal, I have been personally in discussions with Bayer’s management over the last several weeks, along with others regarding alternative strategic options,” added Grant. “We continue to recognize the potential value these types of combinations can create as they accelerate innovation and increase choice for farmers across a broader set of crops, geographies and production practices, while improving the sustainability of agriculture around the world. That is why we remain open and will continue to actively engage in constructive dialogue to pursue value enhancing strategic options.”

HINT: The Key Phrase In The Highlighted Portion = “…Along With Others…”

***********************************************************

And Bayer’s interest in acquiring MON gets incrementally more expensive as the Euro weakens versus the $US.

BTW…Monsanto’s earnings were weak while the outlook was reaffirmed at the lower end of guidance…but well telegraphed for some time.

The Only Move For The Fed = Talking Down The Dollar

dollar down

Headline:
Their Final Bullet

The Fed has no more maneuvers other than to jawbone the dollar lower.

Because for a variety of reasons a strong dollar, in the current market environment, is akin to tighter monetary policy. And right now, in the wake of Brexit, tighter monetary policy = clearly not an option.

Plus, a stronger dollar [by virtue of of “the peg”] strengthens the Chinese Yuan + Saudi Riyal…something neither country will tolerate.

*******************************************************

And the dollar’s whip-saw in ’16 has The Fed’s fingerprints all over it.

The Sequence = Flawed Forward Guidance of 4 Rate Hikes [$ Ramp]…Followed By A Slowing US Economy [$ Softens]…And now The Brexit/Global Economic Fears [$ Rally = Flight to Quality]. Of course = The Fed will try to manage the $US lower…with both an absolute intent and, naturally, uncertain outcome..

Their serial monetary policy impotence will certainly never be self-acknowledged.

*******************************************************

This $US chatter may not be immediate but it will likely occur, soon enough, as negative rates are NOT a realistic option in the United States. Plus they have already proven to be ineffective in both Japan [surging yen] + Europe [still weakening economy]…and QE4 [U.S.] is not necessary as rates are plunging without The Fed’s meaningful assistance [notwithstanding balance sheet asset maintenance].

So who will be the messenger? The obvious answer would be the Fed member with the most credibility…but that assumes that there is still ANY credibility remaining at The Fed [which there is NOT].

But, leave no doubt, the message will ultimately be delivered…by somebody. Because as articulated long ago [Oct ’14] on this blog…

The Race To The Bottom

.

AND UNFORTUNATELY…THIS RACE = STILL ON.

Slanted Analysis of Global Business & Financial Markets