In a deal that enables Rupert Murdoch to amass a bigger war chest, 21st Century Fox Inc. is selling its stakes in two European satellite TV companies for $9.3 billion.
Fox's sale of its Italian and German pay-TV systems would provide the company with approximately $7.2 billion in cash — money that could be used to help finance a proposed takeover of Time Warner Inc. It is widely expected that Murdoch will make another run at Time Warner after the company rejected Fox's initial $80-billion offer.
Some analysts contend 21st Century Fox needs to increase its bid to above $90 billion.
"Fox reloads with cash," Sanford C. Bernstein & Co. media analyst Todd Juenger said in a research report. "Fox and Time Warner are now both engaged in posturing."
In a complicated deal announced Friday, Fox agreed to sell its interests in Sky Italia and Sky Deutschland to satellite TV service British Sky Broadcasting Group. Fox owns a 39.1% interest in BSkyB, which it plans to maintain.
The transaction marks a departure from Fox's ambitions three years ago when it wanted to take 100% control of the British pay-TV company. However, Murdoch's company was forced to abandon its bid after revelations that its journalists in London had been hacking into the cellphones of celebrities, crime victims and members of the royal family.
Now, Murdoch has set his sights on Time Warner.
The New York media giant, which owns cable channels HBO, CNN, TNT, Cartoon Network and Hollywood's largest movie and TV studio Warner Bros., is trying to resist Murdoch's advances. Time Warner board members this week unanimously approved a change to the company's bylaws to try to thwart dissident shareholders who might agitate for a sale to Fox.
The amount of cash that Fox has available to make its run at Time Warner has become a key piece of the puzzle.
Fox's credit rating could be put at risk if it had to borrow substantially more than $35 billion to buy Time Warner, according to a report this week from Moody's Investors Service. Fox already carries $19 billion in debt but maintains a Baa1 credit rating, according to Moody's.
Murdoch has long operated his business with a pile of cash handy. That has been important to the 83-year-old media mogul ever since he nearly lost control of his empire in the early 1990s when a bank called in some loans and the company did not have enough money in reserve to easily make its payments.
The $80-billion Fox bid that Time Warner rejected included $29 billion in cash, and Fox is believed to have secured as much as $25 billion in lending ability to finance an acquisition. The deal structure was designed to include 60% of the value in Fox's non-voting shares, with cash making up the remaining 40%.
But some shareholders have urged Murdoch to flash more cash.
Fox has said it would sell cable news channel CNN if it was to succeed in its bid for Time Warner. Fox already owns the competing Fox News Channel, and controlling two major cable news outlets probably would not fly with federal regulators who would have to sign off on any such media merger.
Analysts and company insiders believe that a sale of CNN could fetch $6 billion to $8 billion.
Fox currently has $5.5 billion in cash on hand.
The cash component of the BSkyB deal was approximately $8.6 billion. However, Fox said it would spend about $900 million to buy shares in BSkyB, which previously announced an equity offering, in order to maintain its 39.1% ownership stake. Fox's after-tax cash proceeds from the sale would be about $7.2 billion.
As part of the transaction, BSkyB would transfer its interest in National Geographic Channels International to Fox, which would enable Fox to boost its ownership stake in the popular channels to 73%.
BSkyB would become a European juggernaut by picking up Sky Italia's 4.7 million subscribers and Sky Deutschland's 3.7 million subscribers. That would bring BSkyB's subscriber ranks to nearly 20 million, covering homes in Britain, Ireland, Austria, Italy and Germany.
The proposed change in ownership requires the approval of European regulators as well as shareholders of British Sky Broadcasting.
On Friday, Fox tried to assure Wall Street that it would make judicious use of the proceeds from the sale of Sky Italia and its 57% stake in Sky Deutschland.
Fox said it would use some of the money to buy back its own shares to bolster the value of its stock.
"Our share buyback program will be executed regardless of any potential acquisition or investment activity by the company," Murdoch said in a statement Friday.
Investors have not forgotten Murdoch's dogged pursuit of Wall Street Journal owner Dow Jones & Co. in 2007. Murdoch spent $5.6 billion — at the top of the market — to cajole the owners to sell the financial news organization. Murdoch's company eventually wrote down nearly $3 billion of that acquisition.
Fox said it would unveil the details of its stock buyback Aug. 6 when it discusses its fiscal fourth-quarter earnings.
The company's shares fell 11 cents Friday to $32.81. Fox shares are trading 7.5% lower than before news of its bid for Time Warner became public last week.
Time Warner shares rose 98 cents to $84.99 — a penny below Fox's initial offer.
"The vast majority of investors we've spoken with believe a deal should get done, somewhere around the $100-a-share range because it would be the best outcome for shareholders of both companies," Bernstein's Juenger said. "Of course what should happen and what does happen don't always end up being the same thing."