AT&T announced it will acquire Time Warner Inc. for $85.4 billion.
The deal puts HBO under the AT&T umbrella, as well as Turner Networks, home to CNN, TNT and TBS. AT&T would also control the powerful Warner Bros. TV Studios operation, as well as Warner Bros. Pictures. The purchase comes as AT&T is working to launch an OTT service called DirecTV Now later this year, and solidifies AT&T’s desire to supply content alongside wireless and wired network connections.
Indeed, Time Warner’s content assets will be added to AT&T’s telecom operations, and the combined company said the transaction will unite “the world’s best premium content with the networks to deliver it to every screen, however customers want it.”
Although the companies said the agreement has been approved unanimously by the boards of directors of both companies, Time Warner shareholders still need to sign off on the deal. The U.S. Department of Justice will also need to approve the transaction. The companies said they expect the transaction to close by the end of 2017. Reports had indicated a deal was imminent.
The deal follows on the heels of AT&T’s blockbuster $48.5 billion purchase of satellite TV distributor DirecTV in 2015. And it comes 16 years after AOL announced a now-failed merger with Time Warner.
AT&T has made no secret of its desire for more content. During the past several years, AT&T has been developing content production wherewithal, mostly via a partnership with former top-level 21st Century Fox executive Peter Chernin and his Chernin Group. But an acquisition of Time Warner would take AT&T’s vertical integration, at least in terms of its ability to feed itself video content, to a whole new level.
Analysts offered mixed outlooks on the deal.
Bernstein’s Todd Juenger said Time Warner’s focus on subscription-based assets like HBO is a risky proposition at a time when consumers are cutting the cord.
“Time Warner offers relatively high visibility through its subscriber fees and TV production/licensing, while having low exposure to linear advertising,” Juenger told investors Friday, prior to the official announcement of the deal. “But that makes them more exposed to affiliate fees, where we believe cord-cutting will get marginally worse, not better. We continue to have reservations about the long-term positioning of the TNT and TBS networks, and don't see enough upside at HBO to offset.
Other analysts also offered tempered views. “We don’t think this transaction improves the value of AT&T, nor does it improve their strategic positioning,” wrote the analysts with New Street Research, just prior to the official announcement of the deal. “The best corollary for this transaction is Comcast / NBCU. We see scant evidence that owning content and distribution has augmented the value of either asset. To be clear, Comcast has created a great deal of value with NBCU, but this was because they bought an undermanaged, under monetized asset cheaply and they did a phenomenal job of improving its value. Owning Cable too had little, if any, impact. TWX isn’t cheap and it isn’t poorly run. In addition, we think Media assets in general face much stiffer secular headwinds now than when Comcast bought NBCU. AT&T may be able to post great EPS numbers for years to come, but they are exposed to yet another set of assets that we think will face pressure over time.”
For its part, AT&T argued that the transaction would be a financial positive for the company. Specifically, in the company’s release, AT&T said it expects $1 billion in annual run rate cost synergies within three years of the deal closing. AT&T added that, by the end of the first year after close, the company expects net debt to adjusted EBITDA to be in the 2.5x range.
Overall, the companies said the 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.
“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, in a release announcing the deal. “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. We’ll have the world’s best premium content with the networks to deliver it to every 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. We intend to give customers unmatched choice, quality, value and experiences that will define the future of media and communications.”