Content is King again: the bid for Time Warner

It was a few months ago when I last wrote about Time Warner concluding back in February that:

'The share has actually fallen, with the general market malaise, into the low US$60s over the past couple of months.  At prevailing I estimate it trades on x10.5 EV/ebit FY14e. 

 
I can easily see Time Warner shares at US$70+.  I will be looking to add in the low US$60s, following these results, if the opportunity becomes apparent'

And I did add in the low US$60s which makes today's newsflow doubly interesting:

'The media giant 21st Century Fox, the empire run by Rupert Murdoch, made an $80 billion takeover bid (around $86.00) in recent weeks for Time Warner Inc. but was rebuffed, people briefed on the matter said on Wednesday. As WSJ reports, The offer was first made orally in June and then with a formal letter in July. Time Warner rejected the offer curtly, after Chief Executive Jeff Bewkes took the proposal to the board'

In my research pieces on Time Warner I typically concluded that the value was in the content that the company produced and it seems that Mr Murdoch agrees. 

So what is a fair price?  Well I always worked on the principle that a fair value for a sensible content business like Time Warner was around x12 forward EV/ebit or getting on for a US$75 share price.  Add on a couple of EV/ebit points to reflect the potential value of synergies and you get to about the level of Mr Murdoch's apparent bid. 

So it is not a mad bid at all.  In fact it is a sensible first approach level.  Mr Murdoch certainly can go higher given the content empire this is going to create. x16 forward EV/ebit would be a just under US$100 Time Warner share price equivalent level.   

Of course Mr Murdoch may not decide to come back but the content prize to me seems big enough to justify an approach near that magic three digit share price level.  That is why I will only take a few profits today on my Time Warner position.