Time Warner’s loyal investors would support sale of company
It’s not just activist shareholders who want to see big changes at Time Warner.
Two of the New York media giant’s largest longtime investors are also running out of patience and would support a sale of all or parts of the company, The Post has learned.
Time Warner Chief Executive Jeff Bewkes was slated to meet with one of the company’s biggest investors last week as he tries to head off a potential proxy fight, sources said. He is scheduled to meet with another top investor this week.
“These guys want to see change,” referring to a sale, said one source with direct knowledge of the situation. “Everyone wants a change there.”
Time Warner declined to comment.
The face-to-face meetings come as activists circle the company. Already one well-known activist has taken a position in Time Warner, according to a source who declined to name the fund.
Several sources said they believe Carl Icahn, who waged a battle a decade ago to break up Time Warner, is buying up shares and will take another run at the company.
Icahn did not return calls seeking comment.
The Post reported last week that former Icahn protégé Keith Meister, the head of Corvex Capital Management, is building an activist position in Time Warner.
In 2006, Icahn unsuccessfully pushed then-CEO Dick Parsons and No. 2 Bewkes for a Time Warner breakup. After Bewkes rose to the top job two years later, he followed Icahn’s blueprint and spun off several of its businesses, including Internet unit AOL, Time Warner Cable and the Time Inc. publishing division.
While Bewkes has streamlined the company, he rebuffed a 2014 takeover bid from 21st Century that valued Time Warner at $85 a share.
Fox denied last week it had made a new offer to buy Time Warner, home to HBO, cable networks TBS and TNT and the Warner Bros. film studio.
Shares of Time Warner closed Friday at $71.17, roughly where they were before 21st Century made its bid. The shares were trading as low as $65.52 just a week ago before shooting up on hopes that activists might force a sale.
Time Warner shares have been slumping, along with the rest of the media sector, on fears that cable-TV programmers won’t be able to command big rate hikes from distributors as more cable customers cut the cord. Traditional pay-TV is also facing growing competition from streaming services.
There is speculation that Amazon, which is ramping up its Prime video streaming service, would be interested in buying the content-rich Time Warner.
The situation could come to a head soon with all of Time Warner’s board seats coming up for election this year. Activists could spark a boardroom battle by nominating their own slate of directors, starting in late February, sources said.
That doesn’t give Bewkes much time to appease restless shareholders.
Nevertheless, Bewkes just re-upped his contract to stay on another three years — a sign that he has the backing of the board. His deal includes a “golden parachute” in the event the company is sold.
Conference post-view: Key takeaways, themes, sentiment, and investor survey results
Supply response key over next few months
We continue to believe it may take another few months to have greater confidence in the extent of the US supply response and whether it is sufficient. At the conference, the bulk of companies indicated
they plan to keep 2016 capital expenditures within cash flow or within cash flow after asset sales, and companies with existing 2016 guidance/commentary appear likely to reduce their guidance over the next
two months. So companies are directionally moving towards the mindset of $40/bbl oil or less when setting budgets (vs. $50/bbl in 4Q15); continued low oil prices are needed ahead of actual guidance.
Activity falling, but OFS deflation persists
With oil prices at low levels, oil service companies have limited visibility on how weak 2016 could be – land drillers predicted rig activity could fall another 10%-20% in the US and around 10% in the international markets. Offshore drillers project a drop of 10%-15% in jack-up/floater rig count in the coming 12-months. There was mixed commentary on services/product pricing with stabilization for pressure pumpers/land drillers and continued declines for offshore equipment/sand/well servicing.
Conference M&A datapoints mixed
Super majors (XOM, COP) noted the bid-ask spread as it relates to producer M&A is relatively wide, although XOM noted the spreads are showing signs of tightening. Among E&Ps, the need to take out
weaker balance sheet producers’ debt at a significant premium to current levels made M&A something that many viewed as less likely. Offshore drillers and midstream companies indicated potential
consolidation activity may pick up in the year ahead.
Equity issuance a double edged sword
Pioneer’s $1.4 bn equity offering (Jan 5) could open the door for others to test waters, particularly given credit market tightness. We believe other companies – particularly those seeking to avoid a credit rating
downgrade and/or those expecting oil prices to fall in 2017 – could look to issue equity. While this could help individual companies, it has increased investor concerns that financial stress is insufficient to bring
oil markets back into balance.
Sentiment is bearish NT; constructive LT
Investors are not calling for a sharp recovery in oil prices, though there is still an optimistic view that the oil market will begin to tighten in 2H 2016.
Buffett’s revenge
Services like Airbnb are altering the economics of the hotel business
FOR those exhausted by the festive season, now is the time to book a holiday. Hotels in New York’s Times Square cost four times more on New Year’s Eve than they do just a week into 2016; a room at the cheapest four-star property in Cancún in Mexico on December 31st was half as dear by January 7th.
The economics behind this price crash are simple: hotels are expensive to build and staff, and demand for them is seasonal. Only by ramping up prices at peak times can they be run profitably. But seasonality inflicts wider economic costs than eye-watering bills. Tourists find other destinations because rooms are full on their desired dates and, despite lower prices, inventory goes unused during the off-season. One-off events like sports tournaments, concerts and conferences can exacerbate the problem of mismatched supply and demand, by flooding cities with visitors for just a few days.
The shareholders’ meetings in Omaha, a Midwestern American city, of Berkshire Hathaway, a financial conglomerate, provide a good illustration. In 1980 12 people showed up to the first one, including the firm’s boss, Warren Buffett. These days, the gathering draws some 40,000, the equivalent of nearly 10% of the city’s population. Omaha’s few hotels have built their business models around this surge, jacking up prices to as much as $400 a night and imposing three-day minimum stays around the one-day event. This has outraged the frugal Mr Buffett, who has threatened to move the conference to Dallas.
Happily, home-sharers have begun to offer some competition. In the three weeks before the 2015 meeting, 1,750 Omaha residents added new properties to Airbnb—the equivalent of three Omaha Hiltons, the city’s biggest hotel. That brought the number of Airbnb listings in the city to 5,000, of which 76% were occupied on May 1st at an average price of $209. Moreover, Airbnb hosts only charged 60% more during the meeting than in days before and after. The surge at hotels was 200% or more.
Omaha may be an exceptional case, but it reflects a trend. Across the 31 specific events for which Airbnb shared data, the number of listings rose by 19% in the three preceding weeks. Three times as many stays occurred during the period of the events as in the weeks before and after. Even cities where supply has expanded slowly are seeing more stays. Airbnb bookings during the Volta art fair in Basel, Switzerland, last year were 268% higher than during the neighbouring weeks, even though listings rose by only 6%.
The Airbnb figures do not spell the end of extortionate hotel prices. Spare-room rentals and hotels are not perfect substitutes: many visitors want the service and convenience of a hotel. Room rentals, naturally, have more of an impact in smaller cities than in big ones, which can more easily absorb an influx of visitors. Airbnb’s turnover in Paris during the 2015 French Open tennis tournament rose by a mere 4%.
But by easing temporary supply squeezes, room rentals may change the economics of the hotel business, at least in smaller cities. If hotels can no longer double their prices when demand peaks, that could drive weaker properties out of business. Those that stay afloat may need to increase rates at other times of year, which could further depress off-season travel and hurt complementary businesses such as restaurants and taxis. Conversely, more room rentals should also mean that more money flows directly to residents every time small cities stage a tourist-magnet event. (Airbnb passes on around 85% of guests’ total payments to hosts, whereas hotels spend just 30-35% on labour.) At the margin, that might increase municipal governments’ appetite to host such events. Omaha 2024, anyone?
* Bearishness on the sector is reaching new highs. New year but same volatility and China macro uncertainties. The luxury sector underperformed the market by 15% in the last three months, the short interest has risen for almost all our stocks in 2015, bearishness among the sell side is nearing all-time highs and the sector P/E de-rated to a c.10% premium to European equities. We believe a poor 4Q and slow growth in 2016 are now partly baked into expectations but we still see downside risk to our +4% organic sales growth forecast in 2016e, broadly in line with current consensus.
* Pressure on the cost base may be moderating. We remain structurally negative on the sector and we are not yet calling the end of the earnings downgrade cycle. That said, we see encouraging signs as management teams start taking actions to better control costs. Hiring freezes are in place and net store closures are now common practice. In addition, rent inflation is moderating to mid-single digits, more in line with sales trends.
* The sector remains highly cash generative. Investors no long receive better growth by investing in Luxury vs. European equities. But, do get exposure to long-term cash return optionality. Balance sheets are strong as we estimate a net cash position at sector level by 2016 and FCF generation should improve as capex spend declines, despite margin pressure. We believe Hugo Boss and Hermes have attractive cash return potential.
* LVMH up to Neutral, reiterate Underperform on Burberry and Kering. Demand recovery is unlikely to rescue the sector so defensive attributes and well-managed cost bases will be the order of the day for luxury stocks in 2016. We think Burberry is structurally challenged and we should see further earnings downgrades. Kering has performed well on expectations of a recovery in Gucci thanks to new products but we expect a slower relaunch and further pressure on Gucci margin. We upgrade LVMH to Neutral in a note published today
L'Oreal - The beauty of premium growth at sector-relative lows; onto CL-Buy
L’Oreal has underperformed the sector by 6% over three months and trades at a 10-year sector-relative low (NTM P/E), ahead of a year in which we see: (1) top-line growth acceleration (driven by the US/China); (2) better margin expansion as FX headwinds unwind, A&P falls and SG&A stabilises; and (3) EPS accretion from use of cash (as per French law, the second anniversary of the share buyback from Nestle allows for further transactions). We do not believe L’Oreal’s sector EPS growth premium is adequately valued by the market, and show its sector-relative LFL growth is within its historical range, contrary to common belief that its growth premium has eroded sharply.
Beiersdorf - Removed from Pan-Europe Sell List
We upgrade Beiersdorf to Neutral (from Sell) following a recent pullback in shares (down 8% over the past month). Beiersdorf’s sector relative premium has come back within its historical range (to 30%) and below its 10-year average (45%). Like the consumer staples sector, Beiersdorf outperformed the market in 2015 as investors sought stability. Since being added to the Sell list on Dec. 2, 2014, the shares are up 11.2% vs. the FTSE World Europe -1.7% (+19% and +3% over the past 12 months). However, Beiersdorf has lagged the consume staples sector (by 2% over the past 12 months and 3% since Dec. 2), on disappointing 1H15 topline growth.
Greater capital clarity gives Green, Amber and Red lights for bank divis and coupons
Growing clarity of capital requirements for many Eurozone banks in the last few weeks should start to reduce perceived risks for many banks securities and increase visibility on capacity for bank divis or coupons. In this cross-asset note, we explore the implications and investment opportunities.
* Cutting BBVA PT (to €8.5 from €9.6) and SAN PT (to €5.3 from €5.9) on lower divi assumptions
Bank Equity: The Good, the Bad and the Challenged.
The wave of new SREP disclosures released in recent weeks re-inforces some of our key calls for 2016 – and should help reduce the perceived risk of some banks securities. We think asset quality is the largest driver behind the wide divergence (175bp to 325bp) of Pillar II requirements, consistent with ECB efforts to incentivise sharper non-core rundown, and informs our estimates for banks yet to disclose. We think Natixis, ABN, KBC, Bankia and UBS – with the highest management buffers – could positively surprise on payouts. We continue to believe full cash dividends will be constrained for some of the GSIFI banks (UCG, HSBC, SAN, BBVA, BNP, DB) and reinforces the need for non-core run down or stake sales. We also think BARC could negatively surprise on divis.
>>> Leisure sector best ideas
* Carnival (Buy, PO raised to 5400p / US$80 from 4530p / US$68). We think Carnival is still in the early stages of a multi-year change story which is set to improve operational performance, consumer opinion and financial returns. We forecast ROIC and margins returning to the 2005 peak by 2020E, EPS doubling by 2019E and, surplus cash building.
* Whitbread (Buy from Neutral, PO 5080p). With the shares well off their highs, consensus expectations looking more conservative, the fundamental low beta growth story intact (EPS CAGR 11%) and with a less frothy valuation (16x Feb17 PE), we raise WTB to Buy.
* Compass (Buy, PO raised to 1350p from 1250p). We remain bullish on the low beta, high quality, cash generative, long duration double-digit TSR thesis. With c.7% share of a large but fragmented market (c.£200bn) we see many more years of market share gains.
>>> Transport sector best ideas
* Air France-KLM (Buy, PO EUR10). Our EBIT forecasts are 90% and 66% above consensus in 2016 and 2017 due to lower fuel and lighter capex expectations. It trades at 3x PE in 2016 with a FCF yield of 17%.
* Deutsche Post (Underperform, PO EUR 23). Amazon recently confirmed that it’s considering expanding its in-house delivery operations in Germany. This combined with Asian FX risks and mail volume risks (regulated price rises) underpin our underperform.
* Royal Mail (Buy, PO 600p). The key upside risk is the potential to stem market share losses and benefit from rapid growth in parcels (c.10%pa) and eCommerce in the UK. Operational gearing to volume improvements is high (1% volume = c.10% EPS).
2016: Europe a cosy place to be, upgrading SGO, DG and TPK to Buy
We are more optimistic on Europe, contrarian on Emerging markets and avoid US
exposure for 2016. We see a mixed outlook with slightly higher European volumes, a
slower pace in US growth and mixed incremental trends in EMs (improving in India,
Mexico, worsening in Brazil, China). European construction, housing in particular, appear
as attractive, even if the pace of the recovery is likely to be measured. We continue to
see some downside risks for US construction growth, relative to very optimistic market
expectations. We see sector valuation already fairly full (2016 EV/EBITDA of c9x and P/E
of c17x), leaving more space for a potential de-rating than a significant incremental rerating.
We favour Saint-Gobain (upgraded to Buy from Neutral), Travis Perkins
(upgraded to Buy from Neutral), LafargeHolcim (Buy) and Kingspan (Buy). We are more
cautious on CRH (Underperform). We stay Neutral on Wolseley and upgrade
HeidelbergCement to Neutral from Underperform.