Deal for $583 million comes as video service prepares to launch
online pay-TV offering
By Shalini Ramachandranand Lisa Beilfuss
Time Warner Inc. has agreed to buy a 10% stake in video service
Hulu, a move that comes as media companies and cable operators
contend with viewers increasingly cutting the cord and as Hulu
prepares to launch a new online pay-TV service.
Time Warner said it paid $583 million in cash for the 10% stake,
valuing Hulu at about $5.8 billion. The new valuation is triple
what Hulu was worth in 2012, according to a person familiar with
the matter.
Along with the Hulu news on Wednesday, Time Warner also logged
better-than-expected earnings results in the second quarter,
prompting the company to push up its full-year outlook. But the
company's second-quarter profit and revenue still fell from a year
earlier because of slowing revenue growth in its HBO business and
box-office weakness.
Time Warner said Wednesday that its channels -- including TNT,
TBS, CNN, Cartoon Network and Turner Classic Movies -- will be
available live and on-demand on Hulu's new cable-style online video
service, set to launch early next year. Hulu's new service,
confirmed in May, could further undercut traditional cable
providers by offering its "skinny" TV bundle for roughly $40 a
month.
Time Warner Chief Executive Jeff Bewkes said on an earnings call
with analysts that the investment will "increase our company's
exposure to the secular growth in over-the-top," or internet TV. He
said it would also give Hulu more resources to invest in
programming and will help foster "competition and innovation" among
streaming services and traditional cable TV distributors.
In November, The Wall Street Journal reported that Time Warner
was in talks about becoming a stakeholder in Hulu alongside Walt
Disney Co., 21st Century Fox Inc. and Comcast Corp. The deal for a
10% stake doesn't give Time Warner a seat on Hulu's board of
directors, limiting its role in Hulu's strategic decisions.
With the investment, Time Warner is attempting to carefully
thread the needle in trying to reach younger viewers while not
explicitly encouraging cord-cutting.
One sticking point that had to be overcome in talks with Hulu's
owners was that Time Warner wasn't comfortable with the vast amount
of current season content made available on Hulu, believing that
the availability of such content for a cheap price encouraged more
people to cut the cord. Mr. Bewkes has even been vocal about Time
Warner potentially holding back rights to its shows for longer on
its own on-demand platforms before selling them to rival streaming
services.
As a result, Time Warner's deal is unusual for a Hulu
part-owner: It is only making current-season content available on
Hulu's forthcoming $40-a-month virtual cable-TV service, which will
include live channels and on-demand programs. Full current seasons
of shows from Time Warner's networks won't be available on demand
for Hulu's existing $7.99-a-month service, unlike programs from
Hulu's other owners, Fox, Disney and Comcast's NBCUniversal.
While the Hulu announcement doesn't include cable channel HBO, a
Time Warner spokesman said there have been conversations about HBO
gaining carriage on Hulu, and talks are expected to continue.
New York-based Time Warner -- owner of the Warner Bros. film
studio and HBO -- has been grappling with subscriber declines as
more people cut the cable cord and downgrade to cheaper, skinnier
bundles of programming. In an effort to cater to cord-cutters, Time
Warner last year launched HBO Now, its stand-alone streaming
service, and has started offering streaming subscription services
around some of its other brands like Adult Swim.
It has also been licensing to new entrants like Dish Network
Corp.'s Sling TV, Sony Corp.'s PlayStation Vue and, now, Hulu. On
the call with analysts, Turner Chief Executive John Martin said
that Time Warner is striking carriage-fee deals with the newer
players that are comparable to traditional cable and satellite
deals -- including with annual contractual rate increases.
In the second quarter, revenue fell 5.4% from a year earlier.
The decline was largely due to weakness in the company's Warner
Bros. business, where there has been a lack of blockbusters. At the
same time, growth in HBO slowed sharply during the quarter, rising
just 2% after having climbed 7.7% in the first quarter.
A bright spot was Turner's performance, with revenue increasing
6.5% as election coverage at CNN and interest in the NBA playoffs
drew more advertising dollars.
In all, Time Warner reported a profit of $952 million, down from
$971 million a year earlier. On a per-share basis, the company
earned $1.20 a share, up from $1.16 and boosted by a lower share
count. Excluding an impairment charge, among other items, per-share
profit rose to $1.29 from $1.25.
Revenue declined to $7 billion from $7.35 billion.
Analysts had expected adjusted earnings of $1.16 a share on
$7.05 billion in sales, according to Thomson Reuters.
For the year, Time Warner now expects to post $5.35 to $5.45 in
adjusted earnings per share, up from its earlier range of $5.30 to
$5.40.
Time Warner shares were up 2.8% to $77.88 in recent trading.
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com
and Lisa Beilfuss at lisa.beilfuss@wsj.com
(END) Dow Jones Newswires
August 04, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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