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AT&T Is Said to Be in Advanced Merger Talks With Time Warner AT&T Aims for an Empire in Merger Talks With Time Warner
(about 4 hours later)
AT&T is in advanced talks to acquire Time Warner, according to three people briefed on the discussions, a deal that could be the largest in the United States this year. For companies that sell consumers cable and internet service, merely distributing entertainment and programs is not enough. They want to own them.
The transaction is not yet final and may fall apart, said the people, who asked not to be named discussing private information. Time Warner is seeking more than $90 a share, two of the people said. The media conglomerate Time Warner, which owns HBO, CNN and the movie studio Warner Bros., has long been among the most prized takeover targets.
The apparent interest in Time Warner comes more than two years after AT&T announced a $48.5 billion deal for DirecTV, the nation’s largest satellite television provider. The merger created the country’s largest television distributor with about 26 million subscribers, surpassing Comcast. It is being courted by AT&T, a telecommunications giant that lacks ownership of any of the shows and videos it delivers through its various businesses. The two are in advanced talks for AT&T to acquire Time Warner, and a deal may be announced as early as Monday, according to people with knowledge of the discussions.
Another large acquisition would be very difficult for AT&T to digest. The company has a debt load of about $130 billion, with just $7 billion in cash on hand. It could also raise antitrust concerns with regulators, who have quashed several deals this year because of competition issues. A merger would come at a pivotal time in the communications industry, where the giants are scrambling to create entertainment empires to maintain competitiveness as consumers increasingly embrace cheaper, digital alternatives.
With its wireless business facing limits to growth and television challenged more broadly, AT&T has sought to diversify through video content. Analysts have said it may pursue acquisitions to achieve that strategy. More combinations, possibly involving Comcast, Viacom or Apple, could reshape the media landscape. Already, the family that controls Viacom and CBS has asked their boards to study a possible merger, a deal that could happen before the end of the year.
Distributors like AT&T, Verizon Communications and Comcast have been either investing or buying companies that produce the content to gain control over their customers’ entertainment experiences. By purchasing DirecTV, AT&T obtained the rights to N.F.L. Sunday Ticket, giving customers access to every football game. The company also created a joint venture in 2014 with the Chernin Group to invest in media businesses and start internet streaming video services. Regulators have been wary of allowing combinations of businesses that could create less competition and thwart innovation by start-ups, and a tie-up of AT&T and Time Warner could raise concerns. It is a bold move in an election year that will usher in a new administration and a fresh set of regulators.
Still, AT&T has historically been less aggressive than its peers in building a content empire. Verizon recently agreed to acquire Yahoo for $4.8 billion — AT&T was also a bidder and lost. Verizon also acquired AOL last year for $4.4 billion. Time Warner is asking AT&T to pay more than $90 a share in the deal, said the people who asked not to be named because the details are still private.
Comcast owns NBC Universal and has a stake in newer digital media properties, including Buzzfeed and Vox. Earlier this year, Comcast’s NBC division agreed to acquire DreamWorks Animation, which produced the “Shrek” and “How to Train Your Dragon” movies, for $3.8 billion. At a minimum, that amount, which would put the price around $70 billion, would make this deal the largest of the year, surpassing Bayer AG’s $56 billion takeover of Monsanto.
Shares of Time Warner rose 9 percent in heavy trading Thursday afternoon after Bloomberg News reported the discussions. On Friday, its shares were up 8 percent, while AT&T shares were down nearly 3 percent. The transaction is not yet final and may fall apart or get delayed, said the people with knowledge of the discussions. Representatives from Time Warner and AT&T declined to comment.
With the recent run-up in its stock price, Time Warner has a stock market value of nearly $70 billion. AT&T is much larger, with a market value of $231 billion. A combination with AT&T would be an about-face from Time Warner’s strategy just seven years ago. The company divested Time Warner Cable in 2009, and Time Inc. in 2014, in order to focus on developing programs and entertainment.
An army of executives and advisers are working to strike a deal over the weekend, trying to get an announcement out before the markets open on Monday, according to two of the people with knowledge of the deal. The talks have been taking place for several months and became serious in recent weeks. But since then, other cable providers have teamed up with media companies. Comcast agreed to acquire NBC Universal from General Electric Company for about $30 billion in 2009. Verizon acquired the aging internet property AOL last year for $4.4 billion and signed a $4.8 billion deal to acquire the core business of another older internet firm, Yahoo, earlier this year.
Acquiring Time Warner would greatly enhance AT&T’s portfolio of content, something that is increasingly valuable with the popularity of streaming, especially if AT&T could control how it is distributed, Amy Yong, an analyst with Macquarie, said in a note. The terms of the AT&T transaction will most likely be higher than the $85-a-share price that 21st Century Fox was willing to pay for Time Warner two years ago. Time Warner spurned the proposal, saying it could create more value for shareholders by staying independent, and 21st Century Fox, led by Rupert Murdoch, withdrew the offer.
Time Warner would add a 10 percent stake in the streaming service Hulu, HBO’s traditional network and streaming service, the Turner cable TV networks and Warner Bros. film and television studios. AT&T’s interest in Time Warner comes more than two years after it announced a $48.5 billion deal for DirecTV, the nation’s largest satellite television provider. The merger created the country’s largest television distributor with about 26 million subscribers, surpassing Comcast.
“This could help its competitive positioning to not only traditional carriers Verizon, T-Mobile and Sprint but also emerging players Comcast, Netflix and Hulu,” Ms. Yong said. Still, AT&T has historically been less aggressive than its peers in building a content empire. It was a losing bidder for Yahoo, for example.
Two years ago, AT&T started a joint venture with the Chernin Group, a production and digital media holding company, called Otter Media with more than $500 million in funding to acquire, invest and start online video businesses. Those companies include Fullscreen, Ellation and Gunpowder & Sky. But it has had some exposure to content. By purchasing DirecTV, AT&T obtained the rights to N.F.L. Sunday Ticket, giving customers access to football game broadcasts. The company also created a joint venture in 2014 with the Chernin Group to invest in media businesses and start internet streaming video services.
AT&T also is expected to start three new streaming services later this year and has struck deals with a number of media companies to create a pipeline of content. AT&T has a tendency to acquire industry leaders. In the media world that would be Time Warner and Disney, and Disney’s $150 billion market valuation makes it a much larger takeover to swallow. Two other companies, Viacom and CBS, both controlled by the Redstone family, have been exploring a reunification.
Time Warner also is attractive because it is not controlled by a family shareholder, said Omar Sheikh, an analyst with Credit Suisse. The biggest question posed by analysts after Bloomberg News first reported the talks on Thursday is whether or not this transaction would pass regulatory muster. Regulators including the Federal Communications Commission and the Justice Department have historically been skeptical of similar combinations.
“With no blocking/family shareholder, control over a leading film and TV studio, plus valuable sports and drama networks, Time Warner is the partner of choice if any consolidation is to take place in U.S. media in our view,” Mr. Sheikh said. “At best, we believe a lengthy antitrust review of T/TWX with an uncertain outcome may give both sides pause on considering a combination,” Credit Suisse research analysts wrote in a note on Thursday using the ticker symbols for AT&T and Time Warner. “At worst, it may act as a barrier to a deal being proposed, in our view.”
But several analysts pointed out high hurdles for the combined company to get regulatory approval from the Federal Communications Commission and the Department of Justice. One major concern, they said, was the potential harmful effects for consumers of combining a content owner with a distributor, including the fears that the combined company would increase prices, withhold content or harm new competition. Additionally, it is an audacious move with the presidential election just around the corner, which will most likely yield a reshaping of the top regulators that will study this deal. Hillary Clinton has promised to be tough on corporate mega-powers and consolidation within industries. Most analysts have surmised that a deal between AT&T and Time Warner would carry a significant amount of regulatory scrutiny.
Some analysts are skeptical that AT&T and Time Warner would actually reach a deal. For Jeff Bewkes, the chief executive of Time Warner, signing a deal may be worth the risk, if AT&T is willing to pay both a high enough price and a generous breakup fee in the event that the combination is blocked, said Richard S. Greenfield, an analyst at BTIG.
AT&T has said its “plate is full” in absorbing DirecTV, Mike McCormack, an analyst with Jefferies, said in a note. The last comparable merger, involving Comcast’s purchase of NBCUniversal, was approved by the Justice Department and the F.C.C., but Comcast’s attempt to purchase Time Warner Cable was blocked by regulators.
Today’s Time Warner is the byproduct of many rounds of spinoffs and acquisitions, dating back to 1989, when Time Inc. merged with Warner Communications, then creating the largest media conglomerate in the world, with cable, publishing and movie assets. Seven years later, the company acquired Turner Broadcasting, bringing the cable network CNN under its wing. In addition to the potential regulatory challenges, an acquisition of Time Warner would be a large one for AT&T to digest. The combined company would have about $150 billion worth of debt, with around $175 billion in annual revenue. In a low-interest rate environment, financing of such large deals has been more prudent.
In 2000, Time Warner merged with AOL, a combination that has since been seen as one of the largest mistakes ever made in deal making. After the dot-com bubble burst, the value of AOL declined significantly and the company had to write off a $99 billion loss. Time Warner later decided to spin off AOL. Some analysts are skeptical that AT&T could handle the deal. AT&T has said its “plate is full” in absorbing DirecTV, Mike McCormack, an analyst with Jefferies, said in a note.
It spun off the cable operations in 2009, and two years ago, the company spun off Time Inc., comprising publishing properties like Time magazine and Fortune. Time Warner itself is no stranger to slicing and merging. The company is a byproduct of a merger between Time Inc. and Warner Communications in 1989, which created the largest media conglomerate in the world at the time, with cable, publishing and movie assets. Seven years later, the company acquired Turner Broadcasting, bringing the cable network CNN under its wing.
Today, Time Warner’s units include such premium channels as HBO and Cinemax, as well as Turner, which operates TBS, Turner Sports and others, in addition to CNN. Time Warner also runs Warner Bros. Entertainment, which created movies like “Sully,” “Storks” and “Suicide Squad.” In 2000, Time Warner merged with AOL, a combination that has since been seen as one of the largest mistakes ever in deal making. Nine years later, Time Warner said it would spin off AOL at a fraction of its valuation after the dot-com bubble burst.
In June 2014, Rupert Murdoch’s 21st Century Fox offered to buy Time Warner for $85 a share in stock. Time Warner spurned that offer, saying that it could create more value for shareholders by staying independent. Mr. Murdoch withdrew the offer that August. These days, Time Warner’s units comprise premium channels such as HBO and Cinemax, as well as Turner, which operates TBS, Turner Sports and others, in addition to CNN. Time Warner also runs Warner Bros. Entertainment, which released movies including “Sully,” “Storks” and “Suicide Squad” this year.
In the last two years, Time Warner has been under pressure to show that it could create that value especially amid uncertainty about the future of traditional television in a digital media world. Time Warner’s stock price closed at $79.24 on Wednesday, before news of the potential AT&T deal. That’s up about 4 percent from two years ago. If the deal between AT&T and Time Warner succeeds, other media and entertainment companies could become takeover targets. Many stocks in that industry gained on Friday as more reports surfaced about the deal.
Time Warner’s shares gained 7.8 percent on Friday to $89.48, while AT&T’s declined 3 percent to $37.49.