AT&T Agrees to Buy Time Warner in Biggest Media Shakeup

Part cash and stock deal worth $85.4 billion expected to close by the end of 2017

a1AT&T Inc. (NYSE: T), the largest phone company in the U.S., has reached an agreement to buy Time Warner Inc. (NYSE: TWX) for $85.4 billion in a deal that would create a media-telecom behemoth in the biggest media shakeup so far, as reported by The Wall Street Journal on October 23rd, 2016. The Dallas-based wireless carrier will pay $107.50 per Time Warner share, part in cash and stock, in a bold move to acquire content to stream over its network and thereby attract a growing number of online viewers. AT&T said it expected to close the deal by the end of 2017 and thereby effectively ward off a potential buy-out of Time Warner by rivals such as telecom giant Verizon Communications Inc. (NYSE: VZ), Apple Inc. (NASDAQ: AAPL), and even Comcast Corp. (NASDAQ: CMCSA).

a2The AT&T-Time deal, the biggest so far in 2016, would give AT&T control of cable TV channels HBO and CNN, film studio Warner Bros and other coveted media assets, if approved by regulators. The potential deal will likely attract intense scrutiny by U.S. antitrust enforcers on the grounds that AT&T might try to limit distribution of Time Warner content over its channels.

AT&T said the U.S. Department of Justice would review the deal and that the companies were determining which Federal Communications Commission licenses, if any, would be transferred to AT&T in the deal. AT&T’s Chief Executive, Randall Stephenson, would head the merged entity, while Time Warner’s Chief Executive, Jeff Bewkes, would stay for an interim period following the close of the deal to help with the transition.

Financial highlights of the deal

a3AT&T stated that it would finance the cash portion of the deal with new debt and cash on its balance sheet. AT&T also said it has an 18-month commitment for an unsecured bridge term facility for $40 billion, with $25 billion coming from J.P. Morgan Chase & Co. (NYSE: JPM) and $15 billion from Bank of America Corp. (NYSE: BAC). AT&T has only $7.2 billion in cash on hand and already had $120 billion in net debt as of June 30th, 2016. The carrier said it is committed to maintaining its investment-grade credit ratings and forecast that the deal will lead to about $1 billion in cost savings within the three years.

AT&T said the deal would add to its EPS in the first year after closing. It said it expected $1 billion in annual run-rate cost savings within three years of closing, chiefly driven by lower corporate and procurement spending. For AT&T, the potential deal would eclipse the nearly $50 billion DirecTV deal in 2015 and may be its biggest acquisition since its $85-billion takeover of BellSouth in 2006.

Time Warner has agreed to pay a $1.7 billion breakup fee if another company outbids AT&T’s offer. On the other hand, AT&T would have to pay $500 million if the deal fails to culminate.

Perella Weinberg Partners L.P., Bank of America and JPMorgan Chase were financial advisers to AT&T, while Sullivan & Cromwell LLP and Arnold & Porter LLP provided legal advice. Allen & Co. LLC, Citigroup Inc. (NYSE: C) and Morgan Stanley (NYSE: MS) acted as financial advisers to Time Warner, while Cravath, Swaine & Moore LLP was its legal adviser.

AT&T looking to counter slowing wireless business

AT&T sold its Connecticut wireline assets to regional telephone operator Frontier Communications for $2 billion in cash in December 2013, and its wireless towers to Crown Castle for $4.83 billion in the same month to enable it to better focus on its wireless business. However, with the passing years, AT&T’s main wireless phone and broadband service business is showing signs of slowing; the Company had about 142 million North American wireless subscribers as of June 30th, 2016, and about 38 million video subscribers through DirecTV and its U-verse service.

AT&T, which announced its Q3 FY16 financial results on October 22nd, 2016, reported that it lost 268,000 mainstream wireless phone customers, showing that its traditional wireless business is facing intense pressure. Moreover, its video business lost a net 3,000 customers during the quarter, as additions in the DirecTV business failed to surpass the losses in its older U-Verse service. AT&T has lost almost 200,000 video customers since buying satellite television provider DirecTV in 2015.

Converging destinations

If its potential deal with Time Warner goes through, AT&T would rely on its entertainment business for more than 40% of its revenue, enabling it to move away from a U.S. wireless business that has become highly competitive. Following the acquisition of DirecTV, AT&T has spent the past year aggressively negotiating deals with content owners and plans to launch an over-the-top video service by the end of 2016, which would allow users to stream programming over the Web without the need for a satellite dish.

On the other hand, New York-based Time Warner is a major force in movies, TV, and video games. Its assets include the HBO, CNN, TBS, and TNT networks as well as the Warner Bros film studio. Time Warner also owns a 10% stake in video streaming site Hulu. The HBO network alone has more than 130 million subscribers. For AT&T, the potential acquisition of Time Warner and all its content will provide a greater competitive advantage than just continuing to license it. Time Warner had earlier rejected an $80 billion offer from Twenty-First Century Fox Inc. (NASDAQ: FOXA) in 2014. The potential deal, which marries partners in distribution and content, will trigger multiple layers of complexity for customers, industry regulators, investors and consumer watchdogs as they sort out revenue possibilities and conflicts of interest.

Massive consolidation in media industry

The AT&T-Time deal comes after telecom giant Verizon Communications Inc. (NYSE: VZ) agreed to acquire beleaguered web portal Yahoo Inc.’s (NASDAQ: YHOO) core internet assets for $4.83 billion on July 25th, 2016, after acquiring AOL Inc. (NYSE: AOL) for $4.4 billion in 2015. Earlier in 2011, Comcast Corp. (NASDAQ: CMCSA), the number one provider of video and residential internet service in the U.S., acquired a 51% stake in NBCUniversal Media LLC for $30 billion. Regulators who approved the deal were concerned that Comcast might stifle competition from new online video competitors including Hulu, which is co-owned by News Corp (NASDAQ: NWS), The Walt Disney Co. (NYSE: DIS), and NBCUniversal. However, Comcast agreed to relinquish management rights of its minority stake in Hulu.

With the ongoing consolidation in the evolving media world, AT&T is looking to turn itself into a media powerhouse, as viewing habits change and audiences expect to find their favorite entertainment not only on TV, but on PCs, tablets and smartphones. The increasing convergence of entertainment content being viewed on mobile devices and smart devices also prompted AT&T to acquire satellite TV provider DirecTV in 2015. Moreover, the emergence of new mobile technology, including next-generation 5G networks, could make a content tie-up especially attractive for wireless providers like AT&T, where it would be able to disrupt traditional pay-TV services.

Stock Performance

a7AT&T’s stock stood at $36.86, slipping 1.68%, at the close on Monday, October 24th, 2016, having vacillated between an intraday high of $37.33 and a low of $36.30 during the session. The stock’s trading volume was at 100,553,833 for the day. The Company’s market cap was at $233.78 billion as of Monday’s close.

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Time Warner’s stock stood at $86.74, slipping 3.06%, at the close on Monday, October 24th, 2016, having vacillated between an intraday high of $88.00 and a low of $86.07 during the session. The stock’s trading volume was at 46,692,520 for the day. The Company’s market cap was at $4.01 billion as of Monday’s close.

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