AT&T reached a deal Saturday to buy Time Warner for $85.4 billion, an acquisition that reflects the telecom giant’s desire to amass reputable TV and film content to diversify its massive but mature business of providing Internet access.
In the cash-and-stock deal confirmed by AT&T and Time Warner late Saturday, AT&T will pay $107.50 per share of Time Warner, whose diverse media portfolio includes HBO, CNN, TNT, TBS, Warner Bros., theme parks, Bleacher Report and a 10% stake in streaming service Hulu. The deal, approved by the boards of both companies, is expected to close before the end of 2017.
"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,” said 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."
The deal, if approved by regulators, would be one of the largest acquisitions ever in the telecom-media sector. It also lays bare AT&T's grand ambition to control sizable market shares in both content and distribution businesses, a prospect that will surely trigger concern and scrutiny among federal regulators and consumer rights advocates.
"Joining forces with AT&T will allow us to innovate even more quickly and create more value for consumers along with all our distribution and marketing partners," Time Warner Chairman and CEO Jeff Bewkes said in a statement.
Talks between the companies began in August, when Stephenson, based in Dallas, visited Bewkes in New York and spent several hours discussing the direction of their industries, Bewkes recalled in a conference call with reporters Saturday evening. "I've been involved in a lot of deals in my career," Stephenson said. "This one’s unique. It began negotiating on its own very quickly. It was a natural process."
Stephenson will lead the combined company. Bewkes said has agreed to stay on through the transition period for "a reasonable period of time."
A year ago, AT&T shocked Wall Street by paying $48.5 billion to buy satellite TV provider DirecTV, giving it instant access to nearly all domestic markets for selling its pay-TV service and Internet-TV bundles. Analysts suggested at the time that AT&T would look to beef up its content offerings — already made attractive by DirecTV’s NFL Sunday Ticket deal — to fully seize the benefits of the acquisition.
AT&T’s growth strategy also entails the need to evolve its main business lines — providing Internet and wireless services. While customers’ bills for their telecom needs seemingly grow every year, the Internet market — wired and wireless — in the U.S. is saturated and growth potential is limited.
DirecTV and AT&T’s other pay-TV service, U-Verse, provide a level of revenue diversity. But investors still have been clamoring for AT&T to look elsewhere for growth, particularly as the market turbulence brought on by streaming technology and “cord-cutting” provides both opportunities and threats. With the integration of DirecTV largely completed, AT&T planned on focusing on buying more media and entertainment content companies.
"They have the pipes and the distribution platform. And the next piece in the value chain is content," says Roger Entner, an industry analyst and founder of Recon Analytics. "If you have the right content, your platform and pipes are a lot more valuable. And you don't have to pay (content companies) all that money."
Similar concerns also drove Verizon to pay $4.8 billion to buy Yahoo's core businesses, including Yahoo Sports and Yahoo Finance. Verizon also paid $4.4 billion to buy AOL a year earlier.
Meanwhile, Comcast, another Internet service giant, continues to prove the benefits of business diversity quarter after quarter with revenues from its NBC Universal unit — including NBC, Telemundo, Universal Pictures and Universal Studios — compensating for declines in cable TV service customers.
AT&T also has plans to provide its own video streaming services to compete with Netflix and Amazon in the coming months. To get ready for the launch, AT&T has been signing deals with content providers, and Time Warner's programming will provide a significant boost in the new services' show lineup.
AT&T also gets direct access to HBO's know-how in streaming directly to subscribers. HBO has been operating its subscription-based streaming service, HBO Now, since 2014. "This could help its competitive positioning to not only traditional carriers Verizon, T-Mobile and Sprint but also emerging players — Comcast, Netflix, and Hulu," wrote Amy Yong, an industry analyst at Macquarie Capital, in a note to clients.
Time Warner's programming could also produce marketing advantages. For example, AT&T can entice more Internet customers by offering packages in which streaming HBO or TNT's basketball games would not count toward their monthly data limit. AT&T already has a similar promotion. Streaming shows through DirecTV's app doesn't count toward AT&T wireless customers' data limit.
"You can put AT&T branding on every HBO show," Entner said. "All the positive halos that come from good content can now be transferred to AT&T."
Consumer rights advocates questioned how the deal would affect the competitive landscape in a telecom industry that's being rapidly upended by new technology and consolidation. With Time Warner as its sister company, DirecTV could threaten other content companies if their fees-and-rights negotiations stall, they say.
"AT&T might also make it more expensive or difficult for competitors to DirecTV or to its streaming service to access Time Warner programmer, hoping to drive customers to its own platforms,” wrote John Bergmayer, senior counsel at consumer technology advocacy group Public Knowledge, which has generally opposed industry consolidation.
For Time Warner, being acquired has seemed almost inevitable. Its assets, particularly HBO, NBA basketball on TNT, Warner Bros.' television studio and DC Entertainment film franchises, including Superman, Batman and The Flash, are highly prized by other media companies. With a diverse set of networks, Time Warner also has been a relatively healthy business even as the number of cable TV subscribers continues to shrink. Its second quarter net income rose 14% to $971 million as all major business lines reported revenue gains. Revenue for the period jumped 8% to $7.3 billion.
Time Warner is also one of the few substantial TV and film content makers that can be bought in the market without the buyer having to overcome a complex controlling stock structure set up by the controlling family — a la the Redstones of Viacom or the Murdochs of 21st Century Fox.
In July 2014, 21st Century Fox, controlled by billionaire mogul Rupert Murdoch, offered to pay about $80 billion for Time Warner, or $84 a share. If completed, it would have been, at the time, the largest media merger since the disastrous AOL purchase of Time Warner for $162 billion in 2000.
A month later, Murdoch withdrew the offer after Time Warner Chairman and CEO Jeff Bewkes said his company was worth more and rejected it.
Time Warner once owned a cable TV service business, but spun it off in 2009 to focus on media content. Time Warner Cable, the spun-off business, was acquired by Charter Communications last year for $56 billion.
As federal regulators review the deal, they will surely revisit a similar acquisition in 2009 when Comcast bought NBC Universal from General Electric. To get the deal approved, Comcast had to agreed to a set of conditions. And AT&T also will likely have to accede to some demands from regulators. One of the conditions for the Comcast-NBC Universal deal was that NBC couldn’t charge Comcast less for its content than other pay-TV providers. "We presume regulators would require AT&T to maintain arms-length transactions with Turner, HBO and Warner Bros.," Yong of Macquarie wrote.
Stephenson said he anticipates the deal to be approved with some concessions since his company is acquiring a "supplier." "It’s a classic vertical merger. No competition is being removed," he said.