Generals: TWX Analysis
May 29, 2016
- NASDAQ: AAPL
- Recent PPS: $100.35
- Shares Out: 5599.8 million
- Market Cap: $561,940
- Net Cash: $20.95 per share
Thursday’s FT article that reported an AAPL executive proposed a bid for Time Warner (NYSE: TWX) is precisely the type of game-changing move AAPL needs to make from a long-term ‘moat’ perspective.
Forget the bullish prospect of AAPL becoming the Berkshire Hathaway of content – buying TWX would begin to solve a basic 2-part math problem for current AAPL shareholders: AAPL’s terminal fair value PE is likely limited to 10x in its current earnings power configuration + its net cash position is worth no more than ‘par’, if not at a discount if the market places a discount on overvalued stock buybacks.
PRO FORMA TWX
The ‘Street’ estimates TWX will earn $7.56 billion of EBIT in 2016. Taxed at 25%, that’s $5.67 billion of NOPAT. In a recent Lex article, the FT estimates AAPL would need to pay $110 billion in total EV – $22B of which is debt – to acquire TWX, which is approximately 19.4 times 2016 NOPAT.
Not only is 19.4 times not expensive for a game-changing acquisition; when AAPL can issue 5% 30-year debt to fund the entire purchase and still have almost zero turns of net leverage + convert its net cash position into a durable, high multiple asset…19.4 times could be considered a bargain.
In a recent write-up, I estimated that AAPL’s current ‘normalized’ earnings power (NOPAT) was approximately $44.5 billion, or $7.95 per share. TWX’s $5.67 billion of NOPAT adds $1.01 per share, for PF earnings of $8.96 per share.
AAPL would see a slight valuation degradation on the surface, as the pro forma PE would rise from 9.98 to 11.2 times (assuming net cash goes to $0). But not only does 11.2 times not account for any operational/bargaining power synergies, IMO it undervalues the long-term ‘moat’ prospects of the pro forma entity…
The FT’s recent Lex column believes that distribution agreements are the cheaper, more financially sound avenue for AAPL to obtain access to content. I disagree.
(A) There is a reason Concast (NASDAQ: CMCSA) owns content and distribution. John Malone himself has used and continues to endorse the model. AAPL needs to leverage its enormous ecosystem into a giant distribution platform, and owning/developing content would only enhance the LT economics.
(B) Simply because AAPL does not have a core competency in developing content doesn’t mean buying TWX would be an unprofitable diversion. Using the Berkshire Hathaway model, AAPL could not only incubate TWX properties against short-term ‘Street’ pressures, but reinvest all TWX earnings (and then some) back into more content development.
Content – economically and commercially cyclical – is the perfect business for the long-term oriented BRK model…and with its historically long-term thinking and prodigious cash flows, AAPL is the perfect Berkshire prototype.