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AT&T-Time Warner Questions: What’s the Price Tag and Why Now?

As AT&T and Time Warner executives hunker down in merger talks, the most significant questions swirling around the deal revolve around the price tag and the timing of the courtship for AT&T.

Speculation is growing that the talks are focused on setting a cash and stock transaction. The floor price was set two years ago when Time Warner rejected an unsolicited offer valued at $85 a share from 21st Century Fox. Analysts are suggesting the deal would have to be in the $105-$110 per share range (although some say higher) to offer a roughly 30% premium over the Time Warner’s trading price earlier this week, before shares began to spike Thursday on news of the AT&T talks.

TW shares were up as much as 12% in trading Friday, soaring to the $93 range before settling back down to close at $89.48, up 8%. That’s still a huge leap from trading in the $79 range during the past few months.

From AT&T’s perspective, the timing of the deal is puzzling, leading observers to speculate that the telco giant was afraid of another suitor beating them to the acquisition of Time Warner.

Apple is known to have flirted – but not much more than that — with acquiring Time Warner in the recent past. The Wall Street Journal reported Friday that Apple is “monitoring the situation closely” as AT&T and Time Warner talks progress. Apple and Time Warner’s HBO partnered early last year on distribution of the standalone HBO Now service, which had helped strengthen ties between the companies. Apple content guru Eddy Cue and HBO CEO Richard Plepler shared the stage on Thursday at Vanity Fair’s New Establishment Summit, talking up the success they’ve seen in tying their two brands together.

Google has been mentioned as another potential suitor as it moves to beef up its video businesses under the YouTube umbrella. There’s also the potential of a deep-pocketed player from overseas, such as China’s Dalian Wanda Group, although that would surely be a much harder sell to investors and regulators. Fox is not in the mix this time around, a source said.

Apple and Google have the financial wherewithal to easily scoop up Time Warner, if they were so inclined. The same cannot be said for AT&T at present. The company closed its $48 billion acquisition of satellite giant DirecTV last year. It already has about $126 billion in debt on its books, a load that would balloon to nearly $200 billion with a Time Warner transaction, according to an analysis by New State Research’s Jonathan Chaplin. AT&T reports its third quarter earnings on Tuesday, which is likely another factor in the rush to get an agreement in hand.

The lack of overlapping assets between AT&T and Time Warner would limit the amount of cost savings that could be immediately squeezed out of the combination. AT&T chairman-CEO Randall Stephenson has made no secret of his interest in expanding the telco’s reach in the content arena. But AT&T observers expected Stephenson to wait at least another year to take on an acquisition of this magnitude. Peter Chernin, the former News Corp. COO who launched a digital content venture with AT&T in 2014, is understood to be advising Stephenson on the Time Warner talks amid speculation he could play a larger role if the deal comes together.

The timing of setting a cash-and-stock deal is less than idea for AT&T as its shares have been in a slump since mid-August, dropping nearly 17% during the past two months. The stock closed at $38.65 on Thursday. It took another 3% hit on Friday as the reports of the acquisition talks gained steam.

Reaction to the prospect of a deal was mixed among Wall Street observers. Some were skeptical of the value of marrying Time Warner’s content with AT&T’s satellite TV and high-speed Internet services. Others suggest that adding Time Warner’s high-end content would help AT&T position DirecTV to compete with Comcast and other large MVPDs and help AT&T enhance its wireless offerings on the telco side of the equation. DirecTV is about to embark on the ambitious launch of an Internet-delivered channel package, DirecTV Now, in the hopes of making a more attractive offer to subscribers for bundling video and high-speed data services.

“The price paid for any deal could be overkill as (1) licensing content has become more pervasive than it was a few years ago and (2) exclusivity is not necessary and in fact may not be a good use of Time Warner’s valuable content,” Cowen & Co. analyst Colby Synesael. “It is not clear how 1+1 in this case equals something greater than 2 despite AT&T’s success with other large acquisitions.”

Chaplin, who covers AT&T for New Street Research, sees AT&T’s interest in acquiring a significant content portfolio as a “defensive” play against competition on the video and wireless services front coming from Comcast and other cable giants.

“We are very skeptical of there being synergies between owning both content and distribution assets, but both AT&T and Verizon appear to have a different view,” he wrote.

The specter of the disastrous AOL-Time Warner merger, completed in early 2001, hangs over any transaction involving Time Warner. Under the leadership of Time Warner CEO Jeffrey Bewkes, the company has pursued a clearly defined strategy to pare down its holdings to focus squarely on content. In 2009, the company divested Time Warner Cable, the nation’s second-largest operator, under the rationale that Time Warner would be better served by plowing resources into content creation and distribution, not the capital-intensive needs of an MVPD.

AT&T’s desire to grow may wind up reversing that course with an offer too good to refuse, or an aggressive bid that brings other players out onto the field. Whatever the outside, the flurry of activity around Time Warner in the past 48 hours will be good for other media stocks and likely ignite the consolidation that analysts have been predicting for the past two years or so.

“This final thesis is playing out quicker than we expected, but it demonstrates the embedded value of media content in distribution platforms,” RBC Capital Markets Steven Cahall wrote.

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