AT&T has announced its intention to buy Time Warner in a massive $85.4 billion cash and stock deal, potentially giving the number two US mobile operator a huge push into the media and entertainment industry via one of the largest ever telecom-media acquisitions.
AT&T will pay $107.5 per share. Time Warner turned down an $85-a-share offer in 2014 from 21st Century Fox, which valued it at more than $75 billion.
The deal has been rumoured for the last two days and is now official. It eclipses the operator’s $48.5 billion acquisition of satellite TV provider DirecTV in July last year and follows an announcement in May that it will acquire Quickplay Media.
The planned purchase comes as AT&T is working to launch an OTT service called DirecTV Now later this year, and showcases AT&T’s ambition to supply content alongside wireless and wired network connections.
Huge brands and content range
Time Warner is the home to some premium content from three major business divisions: HBO, Turner and Warner Bros. Time Warner also has invested in OTT and digital media properties such as Hulu, Bleacher Report, CNN.com and Fandango. Unlike the DirecTV deal, a purchase of Time Warner will give AT&T its own content and original programming and provide a serious boost in its battle with (slightly) larger mobile operator rival Verizon.
An official statement from AT&T talked up Time Warner’s status as a global leader in creating premium content, boasting the largest film/TV studio in world and a massive library of entertainment. The operator’s own portfolio claims direct-to-customer distribution across TV, mobile and broadband in the US, mobile in Mexico and TV in Latin America.
The deal is a major threat to US cable TV players. With a mobile network that covers more than 315 million people in the United States, AT&T is striving to become the first US mobile provider to compete nationwide with cable companies in the provision of bundled mobile broadband and video.
AT&T believes a two-sided business model – advertising and subscription-based – will help pay for the cost of content creation.
“This is a perfect match of two companies with complementary strengths who can bring a fresh approach to how the media and communications industry works for customers, content creators, distributors and advertisers,” claimed Randall Stephenson, AT&T chairman and CEO. “Premium content always wins. It has been true on the big screen, the TV screen and now it’s proving true on the mobile screen. We’ll have the world’s best premium content with the networks to deliver it to every screen. A big customer pain point is paying for content once but not being able to access it on any device, anywhere. Our goal is to solve that.”
He continued: “With great content, you can build truly differentiated video services, whether it’s traditional TV, OTT or mobile. Our TV, mobile and broadband distribution and direct customer relationships provide unique insights from which we can offer addressable advertising and better tailor content. It’s an integrated approach and we believe it’s the model that wins over time.”
Stephenson will head the new company. Time Warner chief executive Jeff Bewkes will stay for an interim period following the close of the deal.
Changing role of operators
AT&T’s rival Verizon has itself made a big splash in the media and entertainment industry recently, having acquired AOL for $4.4 billion last year (and also has plans to buy Yahoo). This strategy is more focused on building up an online advertising business rather than media content (although Verizon has acquired lesser known media companies that have tens of millions of young followers, such as Complex Media and AwesomenessTV, distributed via its mobile video app go90).
Today’s news reflects the challenge both AT&T and Verizon face in the US mobile market; they have millions of subscribers who pay monthly fees to use their networks to share photos, watch videos and tap into social networks. But that wireless business alone lacks the means to drive growth now that the majority of Americans have a smartphone and the market is saturated, so major operators are having to diversify away from their core telecoms business. Meanwhile, AT&T and Verizon are facing increased competition from number three and four players T-Mobile and Sprint.
Some critics claim Time Warner’s focus on subscription-based assets like HBO is a risky proposition at a time when consumers are cutting the cord. But AT&T argued the transaction would be a financial positive for the company. It expects $1 billion in annual run rate cost synergies within three years of the deal closing. AT&T added that, by the end of the first year after close, the company expects net debt to adjusted EBITDA to be in the 2.5x range.
Interestingly, on the flip side, analysts believe the move could push US cable TV company Comcast (which in recent years bought NBC Universal and Dreamworks, and is now challenged by a new, bigger AT&T) into making a play to acquire a mobile operator.
Major regulatory challenges
The ATT/Time Warner union will likely face heavy scrutiny from government regulators, who have shown increasing scepticism about such mega-mergers. AT&T is already the largest pay-tv operator in the US after its DirecTV acquisition.
Donald Trump, the Republican candidate for president, told an audience in Gettysburg yesterday that he would block the deal if elected. The acquisition would give AT&T “too much concentration of power”, he said.
Hillary Clinton this month promised to “strengthen anti-trust enforcement and really scrutinise mergers and acquisitions, so the big don’t keep getting bigger and bigger”, she told a crowd in Toledo, Ohio.
US lawmakers are already worried about cable company Comcast’s $30 billion acquisition of NBC Universal (approved in January 2011), creating an industry behemoth. And there’s also the need for AT&T to gain approval from Time Warner shareholders. Despite these obstacles, AT&T remains confident the transaction will close before the end of 2017.
Third quarter results
News of the world’s largest planned acquisition this year also spurred AT&T into bringing forward its third quarter results announcement by three days.
Details were brief, with the company stating that revenue increased 4.6 per cent to $40.9 billion (largely thanks to the new DirecTV deal), with net income rising 11.2 per cent to $3.33 billion from $3 billion a year ago . Mobile revenues fell slightly though, from $18.3 billion in the third quarter of 2015 to $18.2 billion this quarter. And it lost 268,000 mainstream wireless phone customers in the period, a further indication of why it needs to diversify away from the US wireless business.
AT&T’s debt at the end of June was believed to be about $120 billion following the DirecTV acquisition and $18 billion spent on an airwave auction. Although it has $7.2 billion of cash on hand, it said the cash portion of the purchase price ($42.7 billion) of the planned mega deal will be financed with new debt and cash on its balance sheet. AT&T said it has an 18-month commitment for an unsecured bridge term facility for $40 billion.