Does A Time Warner Acquisition Make Sense For Apple?

The tech titan, AAPL, has recently expressed interest in buying Time Warner (NYSE:TWX), as mentioned in the New York Post . The multi-billion dollar price of the purchase is not the problem for AAPL, it is the current location of the majority of its cash overseas. It is doubtful that AAPL would consider bringing the cash back to be taxed. The only remaining options would either be to take on additional debt or use stock to complete the transaction. But, does the acquisition make sense for AAPL?

AAPL Analyst Opinion

The Lex team, an expert financial analyst column at FT.com, had the following notes on AAPL and Time Warner:

Apple could buy Time Warner and have $40bn in net cash left over. So why not? In the age of fragmenting distribution, an age Apple did much to bring about, great content is crucial.

Disneys acquisitions of Marvel, Pixar and Lucasfilm left it with an edge over rivals in intellectual property and valuation. And Time Warner’s content is super-premium, including HBO shows such as Game of Thrones, movie franchises such as Batman, and sports broadcast rights.

But we are talking about a hardware company. Its founder, Steve Jobs, admired Disney and also ran Pixar, but never felt the need to pursue a huge content deal.

His successor Tim Cook is in a different spot. Mr. Jobs died with the iPhone still in ascendance. Last quarter, iPhone sales fell year-on-year for the first time since its launch. Mr Cook said that we would definitely buy something larger than we’ve bought thus far.

Mr. Cook has done lots of deals in the past couple of years, but from Flyby Media to Camel Audio, they are small companies. Their innovative technology will be baked into future products. The transactions have not been big enough to dent Apple's cash hoard. The only large deal was Beats Electronics, acquired for $3bn in 2014.

That cash pile now stands at about $155bn, the vast majority held outside the US. So non-US deals, such as the recent $1bn investment in Didi Chuxing, the Chinese taxi-booking app, are more satisfactory, as the money need not be repatriated and taxed.

Of course, Apple could use its own equity or take on more debt. Time Warner has a market cap of $60bn and $22bn of debt. A typical 30 per cent premium is unlikely to be enough. 21st Century Fox's $80bn bid was rebuffed in 2014. Pay 50 percent and the bill comes to $110bn or so.

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Apple has this kind of money. But the premium component, of about $30bn, has to be justified by new value that the combination could create.

Adding Time Warner content to Apple's devices, virtual stores, and subscription services could help solve the distribution problem facing the former company and make the latter's customers more likely to keep buying its devices.

But distribution agreements are a lot cheaper than acquisitions, and making content exclusive to Apple is a non-starter. Content has to be part of Apple's growth strategy, but the price tag need not run to 12 figures.

Written By: Ticker.tv News