Code Names and Covert Meetings in AT&T’s Courtship of Time Warner
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Version 0 of 1. Soon after the wheels of the Time Warner private jet touched down at Dallas Love Field airport on Oct. 11, the media titan’s chief executive, Jeffrey L. Bewkes, and his top lieutenants cautiously made their way to the meeting room of a nearby hangar. The temperature that morning was already rising through the 70s. The high metallic ceiling of the hangar and the roar of jet engines outside made for a very different setting than a conference room in the glass aeries of Manhattan. But the executives did not plan on staying long. Their meeting with Randall L. Stephenson, the chief executive of the Dallas-based AT&T, and a handful of other executives, was intended to be the final blessing to an informal courtship that had begun in August. Within hours, the two chief executives shook hands on the outlines of a deal, including a rough idea of what such a transaction would cost. The Time Warner jet then headed back to New York, with the hard work of deal making about to pick up in earnest. Eleven days later, the two companies announced an $85.4 billion merger that could reshape the media world. This account is based on interviews with multiple executives involved in the deal, some of whom were not authorized to speak publicly about the confidential negotiations. The companies had moved quietly to construct AT&T’s takeover of Time Warner, relying only on top management teams and trusted advisers. Until late last week, they avoided having word seep out, and ended up announcing the acquisition just one day ahead of schedule. The secrecy — including code names and covert meetings in Washington and Nashville — was viewed as essential. Putting together AT&T, one of the country’s most powerful internet providers, with Time Warner, home of HBO and Warner Bros., would be sure to raise concerns among lawmakers and consumer advocacy groups. Skepticism has since arisen from shareholders as well. Shares of Time Warner closed down 3 percent on Monday, at $86.74 — more than 19 percent off the deal’s price tag of $107.50. Executives at both companies sought to reassure investors that the deal made strategic and financial sense despite its huge cost, and that it was likely to pass regulatory muster. Some industry analysts weren’t so sure. “Vertically challenged,” was the headline on a research note by the analyst Craig Moffett, a play on the term “vertical integration,” where a company combines with a customer, rather than a competitor. Nomura said the deal was “puzzling.” Morgan Stanley analysts, however, called the deal a “bold step,” wondering whether the companies were “swinging for the fences.” Yet for Mr. Stephenson of AT&T, the logic of buying Time Warner had been apparent for some time. The laconic Oklahoma native, who has spearheaded billions of dollars’ worth of deals for the telecom colossus, famously maintains a lengthy list of potential acquisitions. And Time Warner — whose “Game of Thrones” series and Batman movies could become a cornerstone of a new media strategy at his company — was on it. Mr. Stephenson had already discussed the attractiveness of Time Warner with Peter Chernin, a veteran Hollywood mogul and a partner to AT&T in an online media venture, at a dinner on Martha’s Vineyard in early August. Later, Mr. Chernin had breakfast with Gary L. Ginsberg, a top lieutenant to Mr. Bewkes, asking if the Time Warner chief would be up for meeting with his AT&T counterpart. On Aug. 25, Mr. Stephenson and Mr. Bewkes met for lunch at Time Warner’s glass-and-steel complex overlooking Central Park, both men said in an interview on Sunday. The two had known each other for years and had sought to catch up on how their businesses were transforming in an age of cord-cutting and Netflix. The topic of a Time Warner takeover arose, and by the end of lunch both men walked away clear about AT&T’s intentions. Over the next several days, AT&T and Time Warner began assembling their teams, careful to keep them tight to avoid leaks. AT&T turned to advisers including the investment bank Perella Weinberg Partners and the law firms Sullivan & Cromwell and Arnold & Porter. Time Warner looked to the bank Allen & Company and the law firm Cravath, Swaine & Moore. Only a few top executives at each company — principally their chief financial officers, deal-making chiefs and general counsels — were brought into the project, code-named “Bobtail.” AT&T was henceforth “Lily,” named after the cheery sales representative in the company’s latest ad campaign, while Time Warner was “Rabbit,” a nod to Warner Bros.’ Bugs Bunny. The next week, the senior executives huddled in a conference room in Arnold & Porter’s Washington offices to get to know one another and begin sharing information. The teams were so tight that even the heads of HBO, Warner Bros. and Turner were kept in the dark. As a result, Time Warner executives had to be discreet in pulling together information about each business. The deal teams quietly labored in multiple cities, including New York and Dallas, as well as Nashville, a neutral location chosen specifically because it was thought that no one there would recognize AT&T or Time Warner executives. Mr. Stephenson and Mr. Bewkes kept in touch, including at another lunch at Cravath’s Manhattan offices in late September. By the time that Mr. Bewkes’s plane touched down in Dallas, board members at both companies were informed of the talks. Despite the complexity of a deal of this size, the negotiations were helped by the shared vision and complementary temperaments of the two chief executives. Time Warner’s primary concern was price, especially since the conglomerate had turned down an $85-a-share takeover bid by Rupert Murdoch’s 21st Century Fox two years earlier. Of less concern was the prospect of government regulators’ busting up the deal, as they did five years ago when AT&T sought to buy T-Mobile USA for $39 billion. The negotiating teams set the fee payable to Time Warner if the deal was blocked on antitrust grounds at just $500 million, well below the norms for a takeover of this size. AT&T executives and advisers also professed little worry about an interloper emerging with a rival bid. Still, if a competitor successfully wrested Time Warner away, the telecommunications company would receive a handsome $1.725 billion breakup fee for its trouble. So quickly had the talks deepened that by the week of Oct. 10, more banks were brought in, in large part to help arrange the financing for the takeover. AT&T enlisted JPMorgan Chase, a longtime lender, while Time Warner brought in familiar faces at Citigroup and then Morgan Stanley. Bank of America joined AT&T’s team just last Thursday. AT&T and Time Warner had long planned to announce their union this past Sunday, two days before AT&T was due to report earnings, and the deal teams prided themselves on having kept their talks quiet for so long. But last Thursday, Bloomberg News reported that the two companies had held discussions in recent weeks. That evening, Mr. Bewkes finally informed the heads of HBO, Turner and Warner Bros. The Time Warner chief spoke with Richard Plepler of HBO and Kevin Tsujihara of Warner Bros. before reaching John Martin, Turner’s chief executive, who was in London. The offer from AT&T promised a healthy 35 percent premium over Time Warner’s share price before the news report. But much of the Time Warner leadership team had also lived through the company’s disastrous merger with AOL at the peak of the dot-com bubble. For one executive, the first reaction was: Do I want to go through a mega-merger again? The next day, The Wall Street Journal reported that the negotiations were advanced and that a deal was imminent, and the companies moved their planned rollout slightly earlier, to Saturday evening. Most major details had been completed by then, and the two companies’ boards met — AT&T’s in Dallas, Time Warner’s in Manhattan — for a final vote. Much work must still be done if the deal is to close by the end of next year as scheduled, including a review by government regulators. Nevertheless, Mr. Stephenson has already begun a tour of the businesses that he may oversee by 2018, including a lunch with Mr. Martin of Turner at the Time Warner Center and a visit with Mr. Plepler at HBO’s offices overlooking Bryant Park. He then boarded a plane to Los Angeles to meet with Mr. Tsujihara on Tuesday. |