AT&T has clinched an $85.4 billion agreement to acquire Time Warner in a stock and cash deal that values the media giant at $107.50 per share, capping a whirlwind few days of negotiations that promise to turn AT&T into one of the entertainment industry’s largest players.
AT&T chairman Randall Stephenson and Time Warner CEO Jeffrey Bewkes held a hastily assembled conference call on Saturday night to unveil the deal that unites AT&T’s DirecTV, high-speed Internet and wireless telco services with the vast film, TV and digital operations at Warner Bros., HBO and Turner. The CEOs emphasized that the agreement came together quickly because they saw the “unique” potential of marrying their assets.
Stephenson said the deal came together quickly because he and Bewkes realized after a conversation about a year ago that they were in sync in their vision for what both companies needed to remain competitive. At first, Bewkes “made it really clear to me he wasn’t selling his company,” Stephenson said. But the more they compared notes, they more both realized “this might be unique enough to make it worth investigating,” Stephenson said.
“We have a very common view of the world,” Stephenson continued. “From the first time Jeff and I had a conversation this thing just had what I would call gravity and it moved along on its own very natural process.”
Bewkes acknowledged that he will eventually step down from the combined entity, but not for some time as the deal will undoubtedly face a long regulatory approval process. Stephenson stressed that he wanted Bewkes to remain closely involved with the company regardless of his position. And Bewkes said he expected that senior creative and business executives at Time Warner’s various divisions “to go on for many years” given the lack of overlap with AT&T’s existing management.
Bewkes touted the merger’s potential to enhance the ability of Warner Bros, HBO and Turner to invest in content because of AT&T’s diversified portfolio.
The merger will “super-charge our capabilities” and give the company more “financial heft,” Bewkes said.
With the fast-changing business landscape that MVPDs and content companies are facing, Bewkes and Stephenson realized that by joining forces they could both better lead the charge in adapting to the multiplatform era.
“That’s how we got to the view that this would be really game-changing,” Bewkes said. “We’re both in the business of evolving our industries faster, not slower.”
Stephenson vowed that the combined company will be an innovator in the delivery of programming and advertising, a vital step for any media giant at a time of upheaval for traditional pay TV providers. Bewkes said that spirit of innovation would be a talent magnet for the content creation side.
The goal is to “evolve the existing eco-system that audiences have used to watch television, and also to move into new capabilities for the way people can access video that go beyond traditional business models,” Bewkes said.
Including Time Warner’s roughly $21 billion in debt, the transaction value is pegged $108.7 billion. The deal calls for AT&T to pay Time Warner shareholders $53.75 per share in cash and $53.75 in AT&T stock. Time Warner shareholders will own between 14.4% and 15.7% of the combined company after the deal closes. Time Warner will account for about 15% of the company’s revenue.
The deal was approved unanimously by the boards of both companies on Saturday. AT&T projected that the deal will close before the end of 2017.
AT&T emphasized the transaction as a marriage of video, content and mobile services. “The future of video is mobile and the future of mobile is video,” AT&T declared in announcing the deal. AT&T predicted it would realize $1 billion on cost savings through the combination of the companies within the three years of the deal closing.
The deal marks a transformational play by Stephenson, one that will leave the telco giant with a debt load of nearly $200 billion. It comes just 15 months after AT&T absorbed the DirecTV satellite service in a $48 billion acquisition.
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For Time Warner, the union with AT&T comes 16 years after the company’s fortunes were badly damaged in the ill-timed merger with AOL at the apex of the first wave of dot-com mania, and some 26 years after the merger of Time Inc. and Warner Bros. set the template for the modern diversified and vertically integrated media conglomerate.
But Bewkes has spent his eight-year tenure at the top paring down the company to three core units — HBO, Warner Bros., and Turner — squarely focused on film and TV content. The Time Warner Cable and AOL units were spun off in 2009, followed in 2014 by the Time Inc. publishing division. That streamlining process made the company more easily acquired by another sizable industry player and also made it easier for TW to command a premium for its blue-chip assets.
The pact with AT&T, assuming it wins approval by regulators, is a victory for Bewkes, who beat back an unsolicited takeover bid two years ago from 21st Century Fox that valued Time Warner at $85 a share. At the time, Bewkes said the offer was too low to consider. But after Time Warner shares fell below the $70 mark amid the broader industry volatility of the past two years, some questioned his quick dismissal of Fox’s bid.
The AT&T deal is viewed as a better option by Time Warner insiders because it is not as expected to produce as much upheaval — at least immediately — for the rank-and-file as compared to a takeover by Fox or another media conglom with duplicate management structures for similar businesses.
The AT&T deal will wind up paying a TW shareholders a premium of about 36% over the stock’s recent trading price. After Bloomberg News reported the first word of the AT&T-Time Warner talks on Thursday afternoon, TW shares spiked more than 10%, closing Friday at $89.48.
Although Stephenson downplayed it, AT&T’s pursuit of Time Warner was hurried along by the rumblings in the marketplace that Apple was ready to approach Time Warner with a rich offer. Apple is known to have flirted with a Time Warner deal in the not-so-distant past.
AT&T aims to enhance its DirecTV business, high-speed Internet and wireless offerings by bringing Time Warner’s top-tier content — from HBO and the Turner cable networks to Warner Bros.’ vast film and TV operations — into the fold. Because AT&T owns the industry’s largest MVPD in DirecTV and is a player in Internet access, the deal will face an arduous regulatory review process in an uncertain political environment for media mega-mergers.
Stephenson stressed that the scale of the enlarged AT&T would benefit consumers by making it easier and more seamless for people to discover and view content on their own timetables across any device. Those talking points are surely advance material for the pitch to Washington to come.
Stephenson acknowledged that the regulators would likely impose conditions on the transaction — standard operating procedure in mega mergers. But he noted that because the operations of the companies represent a “vertical” rather than “horizontal” combination it should not raise anti-trust concerns. AT&T’s effort to buy smaller wireless competitor T-Mobile was nixed by regulators in 2011, but the situation is different this time around.
“No competitor is being removed from the marketplace,” Stephenson said.
On Saturday, even before the formal announcement, Republican presidential nominee Donald Trump said he would block the AT&T-Time Warner deal if he is elected president.
In a sign of how hotly a contested subject the deal will be, the American Cable Association trade group representing smaller operators was quick to raise concerns about the market power that a combined AT&T-Time Warner would wield.
“As the FCC has found in past mergers, combining valuable content with pay-TV distribution causes harm to consumers and competition in the pay-TV market,” the ACA said in a statement issued before the announcement. “If an AT&T/Time Warner deal is forged as reported, the vertical integration of the merged company must be an issue that regulators closely examine.”