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Mergers and Acquisitions

AT&T to acquire Time Warner for $85.4B, deal expected to close before year-end 2017

Harshith Mallya
23rd Oct 2016
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AT&T Inc. and Time Warner Inc. announced on Sunday that they have entered into a definitive agreement under which the former will acquire Time Warner in a stock-and-cash transaction valued at $107.50 per share.This purchase price implies a total equity value of $85.4 billion and a total transaction value of$108.7 billion, including Time Warner’s net debt. The agreement has been approved unanimously by the boards of directors of both companies.

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Time Warner is one of the global leaders in the media and entertainment space, with a portfolio of content creation and aggregation, brands across video programming and TV and film production. Each of Time Warner’s three divisions is considered to be an industry leader:

  1. HBO, which consists of domestic premium pay television and streaming services (HBO Now, HBO Go), as well as international premium and basic pay television and streaming services;
  2. Warner Bros. Entertainment, which consists of television, feature film, home video and videogame production and distribution. Warner Bros. film franchises include Harry Potter and DC Comics, and its produced TV series include Big Bang Theory and Gotham;
  3. Turner consists of U. and international basic cable networks, including TNT, TBS, CNN and Cartoon Network/Adult Swim. Also, Turner has the rights to the NBA, March Madness and MLB, and has invested in over-the-top (OTT) content and digital media properties such as Hulu, Bleacher Report, CNN.com and Fandango.

The deal combines Time Warner's library of content and ability to create new premium content with AT&T's customer relationships, TV subscriber base and leading scale in TV, mobile and broadband distribution.

Randall Stephenson, AT&T chairman and CEO, noted that the acquisition is a perfect match of two companies with complementary strengths who can bring a fresh approach to the media and communications industry. He also believes that it creates immediate and long-term value for their shareholders. He said,

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. A big customer pain point is paying for content once but not being able to access it on any device, anywhere. Our goal is to solve that.

“With great content, you can build truly differentiated video services, whether it’s traditional TV, OTT or mobile. Our TV, mobile and broadband distribution and direct customer relationships provide unique insights from which we can offer addressable advertising and better tailor content,” Stephenson said, adding, “It’s an integrated approach, and we believe it’s the model that wins over time.”

Time Warner Chairman and CEO Jeff Bewkes noted that combining with AT&T would accelerate their ability to deliver premium content to consumers on a multiplatform basis and allow them to capitalise on the opportunities created by the growing demand for video content. Bewkes said,

We’re already making great progress, both in partnership with our distributors, and on our own by connecting directly with consumers. In fact, when we announce our 3Q earnings, we will report revenue and operating income growth at each of our divisions, as well as double-digit earnings growth. This is a natural fit between two companies with great legacies of innovation that have shaped the modern media and communications landscape, and my senior management team and I are looking forward to working closely with Randall and our new colleagues.

In a video, Bewkes also noted that joining forces with AT&T, which has over 100 million subscribers, helps both companies reach their goals faster and better. He noted that Randall Stephenson and his team recognise the value of Time Warner's team and hence aim to retain all talented employees. He said, "I plan to stay on as CEO of Time Warner's businesses, which will become a subsidiary of AT&T."

The combined entity of AT&T and Time Warner will compete with players like Netflix and Amazon Prime video in certain categories like premium shows and OTT offerings. In an interview on Variety, Ted Sarandos, Netflix chief content officer, predicted that the At&T-Time Warner deal would likely face some regulatory questions from the Department of Justice. “How it impacts anybody will be highly dependent on how it emerges,” Sarandos told Variety, “Those are pretty powerful assets. I’m sure it will come under a great deal of scrutiny.”

 

 Customer benefits

AT&T and Time Warner noted that the new company will deliver enhanced access to premium content on all their devices, new choices for mobile and streaming video services, and a stronger competitive alternative to cable TV companies.

With a mobile network that covers an estimated 315 million people in the United States, the combined company will strive to become the first US mobile provider to compete nationwide with cable companies in the provision of bundled mobile, broadband and video.

Owning content will help AT&T innovate on new advertising options, which, combined with subscriptions, will help pay for the cost of content creation. AT&T believes that this two-sided business model — advertising and subscription-based — gives customers premium content at the best value.

Financial benefits of the merger? 

AT&T expects $1 billion in annual run rate cost synergies within three years of the deal closing. The expected cost synergies are primarily driven by corporate and procurement expenditures.

In addition, over time, AT&T expects to achieve incremental revenue opportunities that neither company could obtain on a standalone basis.

Given the structure of this transaction, which includes AT&T stock consideration as part of the deal, AT&T expects to continue to maintain a strong balance sheet following the close of the transaction and is committed to maintaining strong investment-grade credit metrics. By the end of the first year after close, AT&T expects net debt to adjusted earnings before interest, tax, depreciation and amortisation(EBITDA) to be in the 2.5x range.

Additionally, AT&T expects the deal to improve its dividend coverage and enhance its revenue and earnings growth profile. Time Warner provides AT&T with diversification benefits such as:

  • Diversified revenue mix — Time Warner will represent about 15 percent of the combined company’s revenues, offering diversification from content and from outside the United States, including Latin America, where Time Warner owns a majority stake in HBO Latin America, an OTT service available in 24 countries, and AT&T is the leading pay TV distributor.
  • Lower capital intensity — Time Warner’s business requires little in capital expenditure, which helps balance the higher capital intensity of AT&T’s existing business.
  • Regulation — Time Warner’s business is lightly regulated compared to much of AT&T’s existing operations.

The merger is subject to approval by Time Warner Inc. shareholders and review by the US Department of Justice. AT&T and Time Warner are currently determining which FCC licenses, if any, will be transferred to AT&T in connection with the transaction. The transaction is expected to close before year-end 2017.

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