By Keach Hagey, Amol Sharma, Dana Cimilluca and Thomas Gryta
AT&T Inc. is in advanced talks to acquire Time Warner Inc.,
according to people familiar with the matter, a deal that would
create a new hallmark in the rapidly converging realms of media,
communications and the internet.
A deal, which could happen as early as this weekend, would unite
AT&T's portfolio of wireless, broadband and satellite TV
services with Time Warner's entertainment empire, which includes
cable networks such as TNT, TBS, CNN, the coveted premium channel
HBO, and the Warner Bros. film and TV studio.
The talks toward what likely would be a cash-and-stock deal have
come together quickly, are fluid and still could fall through,
according to people familiar with the matter. An agreement also
could be delayed, they said.
Time Warner shares rose 6.7% to $90.94 in early-afternoon
trading after The Wall Street Journal reported the advanced talks,
white AT&T fell 2.6% to $37.65.
A merger of the companies would be the most ambitious marriage
of content and distribution in the media and telecom industries
since Comcast Corp.'s 2011 purchase of NBCUniversal and would
create a behemoth to rival that cable giant. A transaction would be
far and away the biggest media deal of recent years. Time Warner
has a market capitalization of $71 billion, while AT&T's was
$231.7 billion.
A deal likely would get intense regulatory scrutiny. Regulators
have showed misgivings about the Comcast-NBCU deal -- in
particular, whether obligations placed on Comcast were enforceable
-- so it's unclear if they will be willing to entertain another
such merger.
It's possible other bidders for Time Warner could emerge quickly
to challenge AT&T, including traditional media conglomerates or
tech companies such as Apple Inc. and Google Inc., media executives
and analysts say.
Time Warner likely would want at least $100 a share, which would
be a $105 billion transaction or more, according to Marci Ryvicker,
an analyst at Wells Fargo.
A deal at $100 a share in cash and stock still would add 4% to
AT&T's estimated 2018 earnings per share and shouldn't require
a dividend cut, J.P. Morgan analyst Philip Cusick wrote in a
research note.
A sale of Time Warner to AT&T would have echoes of the
blockbuster 2000 AOL-Time Warner merger -- then the largest deal of
all time. That was a different bet on a converged media future, one
in which AOL's internet service would have complemented and boosted
Time Warner's content. But the merger ultimately proved a failure,
hurt by the unraveling of the dot-com boom, a clash of cultures and
poor assumptions about the way each business could help the
other.
Dallas-based AT&T, led by Chief Executive Randall
Stephenson, has been reshaping its strategy in recent years, as the
U.S. cellular business became saturated and years of consolidation
in that sector left no room for major deals. AT&T's attempt to
buy T-Mobile was killed by regulators in 2011.
Instead, AT&T turned to video, with the nearly $50 billion
acquisition of DirecTV last year, instantly making it the biggest
player in pay television. That pay TV business faces headwinds as
more consumers cut the cord or look to trim their monthly bills,
with streaming services providing new competition in the
marketplace.
With its newfound scale, AT&T spent the past year
aggressively negotiating deals with content companies, with plans
to launch an over-the-top video service by year's end. Owning Time
Warner could offer AT&T a new lane to pursue growth and bring
assets that would help along those streaming media ambitions.
For AT&T, the deal would eclipse DirecTV and may be the
biggest deal since paying $85 billion for BellSouth in 2006. With
$117.3 billion in long-term debt at the end of June, a Time Warner
deal could give the company the world's largest balance sheet with
debt hitting almost $200 billion, according to analysts at New
Street Research. The issuance of new stock, a common move in
AT&T's deal making, increase its total dividend costs, above
the almost $12 billion in current annual payouts.
Bloomberg reported Thursday that senior executives of AT&T
and Time Warner had met in recent weeks to hold preliminary
discussions on various business strategies, including a possible
merger.
Sixteen years since the AOL-Time Warner deal, much has changed,
and the mashup of mobile, broadband and TV that has long been
anticipated has been taking shape quickly. Consumers are streaming
shows on phones and tablets, signing up for TV services without a
connection from a traditional cable or satellite provider, and
doing much of their media consumption on social media platforms
such as Facebook.
Time Warner CEO Jeff Bewkes has positioned his company as a pure
content player in recent years, spinning off AOL as well as the
Time Warner Cable pay-TV unit and the Time Inc. magazine-publishing
division .
In 2014, Mr. Bewkes fought off an unsolicited takeover bid from
Rupert Murdoch's 21st Century Fox, indicating Time Warner wanted a
far higher price than the initial roughly $80 billion offer that
was on the table. (21st Century Fox and Wall Street Journal-owner
News Corp share common ownership.)
People close to Time Warner signaled at the time that the
company would prefer to test the marketplace more broadly -- and
potentially see if big tech or telecom players had interest down
the road. At the time, AT&T was busy digesting its DirecTV
acquisition, so it wasn't a potential buyer.
Mr. Bewkes has used the intervening time to try to persuade Wall
Street he could run Time Warner effectively as a stand-alone outfit
in a media world where a few distribution giants are achieving
enormous scale.
To answer the concern that Netflix and other streaming services
are appealing to cord-cutters and people who never sign up for
cable in the first place, he launched the HBO Now streaming
service, which had nearly a million subscribers as of March. Time
Warner also carried out cost cuts and layoffs and continued big
content investments.
Among media players, Time Warner is attractive to AT&T in
part because it doesn't have a big shareholder with effective
control and because it is relatively well-positioned for a media
world where cable TV distributors want to carry skinnier bundles of
channels. Time Warner has only a few major networks -- some of
which, like TNT and TBS, carry high-value sports content --
compared to companies that have a host of channels with small
audiences.
Acquiring Time Warner also would get AT&T further into the
streaming business with Hulu. Time Warner bought a 10% stake in
Hulu in August, joining Walt Disney Co., 21st Century Fox and
NBCUniversal as an owner in the $5.8 billion video service.
AT&T also is launching a DirecTV online service aimed at
selling a robust package of TV channels.
Shalini Ramachandran, Dennis K. Berman and Dana Mattioli
contributed to this article.
Write to Keach Hagey at keach.hagey@wsj.com, Amol Sharma at
amol.sharma@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and
Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
October 21, 2016 14:45 ET (18:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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