How Time Warner may wind up in Murdoch's clutches

Rupert Murdoch's 21st Century Fox has begun the chase after Time Warner. Here's why it will be tough for Time Warner to hide.

CNBC reported Wednesday morning that Fox recently made an $80 billion offer for Time Warner, which owns prized assets including the Warner Bros. film and television studio along with HBO, the leading pay-television network. In a statement later Wednesday, Time Warner said it had turned down the offer, arguing that its own plans as an independent company will create "significantly more value for the Company and its stockholders and is superior to any proposal that 21st Century Fox is in a position to offer."

What does Time Warner dislike so much about the offer? One problem is that Fox's bid consists of roughly 60 percent nonvoting Fox shares and only 40 percent cash. While there is a heavy overlap between Fox and Time Warner shareholders at the moment, some may be unhappy with the Murdoch family having effective control of the new company.

Read MoreTime Warner rejects $80B offer from 21st Century Fox

But what if Fox decides to pad the offer further? Murdoch has shown clear willingness to do so in instances such as the 2007 acquisition of Wall Street Journal parent Dow Jones, which Murdoch's News Corp. bought at the top of the market for an eye watering $5.6 billion. A spokesman from Fox, which split into a separate company from News Corp. last year, declined to comment.

Indeed, the current offer isn't exactly insulting. The Fox bid reflects an 18 percent premium to Tuesday's closing price—and even higher compared with levels last month when it was apparently made. It also values Time Warner at nearly 20 times consensus forward earnings. At one point in 2012, Time Warner was trading for as little as 10 times forward earnings.

If Fox offers much more, it's going to be tough for Time Warner to lean back on its existing business plan. While HBO and Warner Bros. are unique assets that will remain attractive for the foreseeable future, Time Warner's key networks division is in a rough patch.

Ratings for CNN, TBS and TNT are all lower in the TV season that started last September in the key 18-49 demographic, according to Nielsen. The trend wasn't much better over the three previous years, suggesting both advertising and even cable revenue could be in trouble. Indeed, Time Warner's earnings before interest, taxes, depreciation and amortization are only expected to rise 7 percent in 2015. according to consensus estimates.

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Another advantage Fox has is that no other bidders look poised to jump into the fray. Certainly, the likes of CNBC parent Comcast, AT&T and Verizon may all be interested in high-quality content like Time Warner's—but not right now.

Comcast is still digesting NBCUniversal and hasn't gotten antitrust approval for its purchase of Time Warner Cable yet. Similarly, AT&T is awaiting the green light to buy DirecTV and Verizon recently levered up to buy Vodafone's 45 percent stake in Verizon Wireless for a whopping $130 billion. Comcast, AT&T and Verizon all declined to comment.

The same probably goes for new media companies like Google. While the Internet giant has dabbled in video content on its YouTube site, the company has largely avoided taking significant equity stakes and preferred to encourage users to create their own material. Spending upward of $100 billion on Time Warner looks like an unlikely move. Time Warner CEO Jeff Bewkes said last week that he hadn't spoken to Google and the Internet company didn't respond to a request for comment on Wednesday.

One other possibility is that Time Warner buys another company and becomes too large for Fox to gobble up. People familiar with the matter say Time Warner has considered buying leading U.S. Spanish language channel Univision, which would add considerable size.

But it's unclear Univision would be sold for a price that makes sense to Time Warner. Univision also has a content sharing deal that would force Time Warner to give up a chunk of Univision's revenue in exchange for material owned by Mexican media conglomerate Grupo Televisa. Given Televisa's likely reluctance to sell its 37 percent stake or give up that content deal, Time Warner probably won't get too excited about such a deal. Time Warner and Univision declined to comment.

Indeed, while Bewkes doesn't look eager to sell out to Fox, he's also unlikely to make a bad investment simply to avoid it. More likely, Murdoch will make an offer that's too good to refuse.

—By CNBC's John Jannarone