AT&T's $85B Time Warner Takeover Is a Media Game Changer
In Game of Thrones, one of HBO's most successful productions, rival houses form alliances and fight for control of the fictional land of Westeros. It could describe the clashes and counterattacks that have become a regular feature of the US communications landscape, where industry giants are battling one another for the consumer dollar. In that real-world game of thrones, AT&T's just-announced $85 billion takeover of HBO owner Time Warner is an empire-building move as dramatic as anything in the TV series.
Rumors that a deal was in the works began circulating on Friday, when sources told Bloomberg that AT&T Inc. (NYSE: T), one of the largest telcos in the US, was holding informal discussions with Time Warner Inc. (NYSE: TWX), which owns a range of high-profile media properties besides HBO, including Warner Bros Entertainment, CNN and Cartoon Network. By late Friday, a full-blown takeover seemed imminent. It was confirmed in an official statement from AT&T over the weekend. (See That Was Quick: AT&T to Buy Time Warner for $85B and AT&T & Time Warner in Merger Talks – Report.)
In a cash-and-stock transaction, AT&T is to pay $107.50 for each Time Warner share, leaving Time Warner's shareholders with about 15% of the combined company. That fee is roughly a fifth more than the current price of the stock, which gained about 8% in value on Friday, and about 36% more than it was worth midweek, before takeover speculation began. In total, that means AT&T will pay about $85.4 billion in pure "equity" for the Time Warner business. But including debts, the takeover will cost as much as $108.7 billion.
AT&T obviously believes such a jaw-dropping fee is justified. "Premium content always wins," said Randall Stephenson, AT&T's chairman and CEO, in the company statement. "We'll have the world's best premium content with the networks to deliver it to every screen."
The desire for premium content is nothing unusual. As the bottom has fallen out of the old-fashioned voice-and-text-messaging business, operators have needed access to attractive content offerings to persuade consumers that high-speed Internet connectivity is worthwhile. Competition from cable companies that have moved in the opposite direction -- from TV into broadband -- has forced telcos to add video to the service mix or risk losing out. An appetite for the "quad-play," which lumps voice, mobile, broadband and TV in a single package and bill, is taking hold in some parts of the world, especially where disposable incomes are being squeezed.
Yet AT&T's takeover of Time Warner betokens much grander ambitions. Last year, the operator spent $48.5 billion on DirecTV Group Inc. (NYSE: DTV), a satellite company with a huge pay-TV audience, having previously catered to a much smaller group of TV customers on its U-verse broadband platform. It is no longer satisfied with "aggregating" content through piecemeal deals with media companies -- a strategy that still prevails elsewhere. Like a conquering Westerosi warlord, it is dispensing with the negotiations and partnerships and taking full control with its Time Warner acquisition.
With a broader line-up of popular programs, AT&T should certainly be able to fortify its DirecTV service and lure more pay-TV customers from its rivals. That business has already gained more than 1.2 million subscribers since AT&T's takeover, giving it nearly 20.8 million customers at the end of September, nearly as many as the 22.3 million served by cable giant Comcast Corp. (Nasdaq: CMCSA, CMCSK) in June. Including the 4.5 million TV customers on its U-verse service, AT&T is already bigger than Comcast in terms of TV subscriber numbers, but it will be keen to extend its lead.
As cable companies plot their own moves into the US mobile market, AT&T also hopes to give consumers less reason to hunt for a mobile alternative. Time Warner content will be delivered across a range of technology platforms, AT&T has made abundantly clear, including on the smartphone screens that are rarely out of customer hands. In theory, AT&T will be able to offer a full quad-play service that includes some of the world's most in-demand content for a single, affordable fee. "A big customer pain point is paying for content once but not being able to access it on any device, anywhere," said Stephenson. "Our goal is to solve that." Lacking the same network and content resources, rivals will struggle to compete.
Next page: A dance with dragons