One Simple Trick For Time Warner To Boost Its Share Price

When Rupert Murdoch announced earlier this month that he was done trying to buy Time Warner , the media company's stock dropped by 10% to $76.09, almost $9 less per share than Murdoch was offering in his $80 billion merger attempt.

If Murdoch thought the stock was worth $85 per share, it's reasonable for Time Warner investors to ask what CEO Jeff Bewkes is going to do to unlock some of that value.

Janney Capital analyst Tony Wible has a fairly simple answer: Issue a tracking stock connected to HBO.

Time Warner has plenty of valuable assets. Warner Bros. is churning out big budget hits like Gravity and The Lego Movie and Warner is the studio behind rich TV shows like The Big Bang Theory and The Voice. The Turner networks (including TNT, TBS and Cartoon Network) are thriving and earn big every year from the NCAA tournament.

But the crown jewel in Time Warner's collection is HBO. Shows like Game of Thrones and Girls and original movies like The Normal Heart are must-see programs that garner tons of buzz. With 99 Emmy nominations, it's the prestige channel to rival all prestige channels and subscribers are more than happy to pay for the station. For the six months ended in June subscription revenue at HBO was up 9% to $2.3 billion.

And while Netflix is nipping at HBO's heels in the prestige department, Time Warner has a big advantage over Netflix in that it can license out its shows. For the most part, Netflix doesn't own the shows it airs. Murdoch was reportedly valuing HBO at $20 billion but Tim Beyers at The Motley Fool says the valuation for HBO alone should be closer to $26 billion.

A tracking stock would give investors the opportunity to bet solely on HBO. Wible believes that a tracking stock could be worth $35 per share leaving the broader Time Warner stock at $60 per share. Combined, they would add up to a $95 Time Warner fair value.

Here's Wible's logic. HBO Go is an incredibly powerful tool. Viewers love it but they can only access it if they are already cable subscribers. That's been a boon for cable companies who are doing everything they can to keep customers who would rather cut the cord and just watch TV using Internet services like Netflix, Hulu and iTunes. But rabid fans of shows like Game of Thrones aren't willing to lose their weekly fix.

HBO could accommodate those online viewers by offer HBO Go as a standalone service. Wible estimates that ever 10 million subscribers who convert to a direct HBO Go service would account for $600 million in revenue and $480 million in profit.

However, those numbers are just fantasy right now. There's no prospect of HBO offering an online service any time soon.

But the threat of that service should be enough to increase the amount of money cable companies pay HBO during the next round of negotiations. Suddenly, HBO has even more leverage than it did before.

Netflix trades at 30 times future EBITDA. If an HBO tracking stock traded at 15 times EBITDA based on current value, it would have a market cap of $31 billion ($10 billion more than Murdoch's valuation). Wible estimates that market cap could grow by $7.2 billion for every 10 million subscribers moving to a theoretical standalone online service.