Winning?

Murdoch may be heading for Pyrrhic Time Warner win

Rupert Murdoch may yet buy Time Warner, but it may be a Pyrrhic victory. The owner of HBO quickly shut off Twenty-First Century Fox's $80 billion or so offer. Yet Murdoch appears determined to buy his media rival. Problem is, he'd need more than twice the synergies Fox has already identified to make the deal work - and a ton of debt. History suggests the octogenarian won't give up - and may destroy value by offering more.

Fox executives reckon there are $1 billion of savings from cramming the two companies together. They could probably find more after examining their target's books. But there's a big gap. Fox's opening bid came at a premium of more than $17 billion to what investors thought Time Warner was worth. Filling that would require slashing some $2.5 billion of costs, once taxed at 30 per cent and capitalized at an earnings multiple of 10. It's hard to imagine this much extra change lying under the cushions at Time Warner.

Of course, Fox might manage the assets better. Murdoch's empire, after all, manages to grow its media properties about 3 percentage points faster per year than Time Warner. Counting on better management, however, is a gamble.

Furthermore, Fox would have to take on a big slug of debt to finance any deal. Borrowing rates are cheap, but the current offer would take the combined company debt to four times earnings before interest, taxes, depreciation and amortisation, after accounting for synergies.

That's higher than most of its peers. And the more debt it issues, the more likely it is to be demoted to a junk rating. That means a higher offer would probably come in the form of more stock, diluting existing investors.

Value-destructive deal-making is nothing new, unfortunately, under Murdoch's reign. He bought Dow Jones for $5 billion in 2007 and wrote off almost $3 billion of the value just over a year later. He sold MySpace for $35 million in 2011 after paying $580 million for the social network in 2005.

Of course, Murdoch's super-voting stock gives him sway to push such deals through. That doesn't bode well for other shareholders.