By Thomas Gryta, Keach Hagey, Dana Cimilluca and Dana Mattioli
AT&T Inc. has reached an agreement to buy Time Warner Inc.
for $85.4 billion in a deal that would transform the phone company
into a media giant.
The wireless carrier agreed to pay $107.50 a share. The deal is
half cash and half stock.
AT&T Chief Executive Randall Stephenson would head the new
company. The companies said Time Warner Chief Executive Jeff Bewkes
would stay for an interim period following the close of the deal to
help with the transition.
The acquisition would put telecom veteran Mr. Stephenson, 56
years old, atop a business that combines the carrier's millions of
wireless and pay-television subscribers with Time Warner's deep
media lineup including networks such as CNN, TNT, the prized HBO
channel and Warner Bros. film and TV studio.
For Time Warner, the deal represents a victory for Mr. Bewkes,
64, who took some heat from investors for rebuffing a takeover bid
two years ago from 21st Century Fox at $85 a share. (21st Century
Fox and Wall Street Journal-owner News Corp share common
ownership.)
The AT&T talks began in August, when Mr. Stephenson paid a
visit to Mr. Bewkes at Time Warner's New York offices. "He came to
talk to me about his view of distribution going forward, and my
view of content," Mr. Bewkes said in an interview after the deal
was announced late Saturday. "He said, 'conceptually it might make
sense for us to combine. Should we investigate?'"
The first hurdle was getting Time Warner interested in selling.
The men continued discussing the possibilities with each other and
talked to their boards, and over the course of the next several
weeks came to the conclusion a merger made sense, Mr. Bewkes
said.
A big difference from the AOL days, Mr. Bewkes said, is that
distribution has become even more central to giving consumers what
they demand from media -- more flexibility in the packages they can
buy, and the platforms they can accesses content from. "There's
more video going on mobile," Mr. Bewkes said. "That's why AT&T
with its scale is such a great home for our content."
Mr. Bewkes said the deal would be good for consumers, in part
because AT&T would be developing more targeted advertising,
with different households seeing the ads most relevant to them.
"You can have more of the cost of high-quality content borne by
advertising, which is better for consumers," he said.
In a separate statement issued by the companies, Mr. Bewkes
said, "This is a natural fit between two companies with great
legacies of innovation that have shaped the modern media and
communications landscape."
Time Warner has agreed to pay a $1.7 billion breakup fee if
another company outbids AT&T's offer, a different person
familiar with the plans said. AT&T would pay $500 million if
the deal gets blocked, this person said.
AT&T will tap $40 billion in bridge loans, a person said,
with $25 billion coming from J.P. Morgan Chase & Co. and $15
billion from Bank of America Merrill Lynch.
For AT&T, the deal would help the carrier potentially find
new areas of growth as its core wireless business has become
saturated and its market share leaves little room for acquisitions.
For Time Warner, the tie-up comes amid pressure for media companies
to bulk up or join with larger entities in the face of
consolidation among pay-TV distributors and viewers leaving their
expensive cable packages for online-streaming options.
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 purchase of NBCUniversal and would create a
behemoth to rival that cable giant. A rigorous regulatory review is
expected, and the acquisition of Time Warner likely wouldn't close
until late 2017, people close to the process said.
Regulators have indicated misgivings about the prior
Comcast-NBCU deal -- in particular, whether obligations placed on
Comcast were tough enough and enforceable -- so it is unclear if
they would be willing to bless another such merger. At the very
least, former regulatory officials say there could be significant
conditions placed on the combination. Republican presidential
nominee Donald Trump said his administration wouldn't approve a
proposed merger of AT&T and Time Warner because he opposes
further consolidation in the media industry.
Competitors of both AT&T and Time Warner are likely to sound
alarms about the scale of the combined company to extract
concessions during the review. Walt Disney Co. Chief Communications
Officer Zenia Mucha said Saturday that "a transaction of this
magnitude obviously warrants very close regulatory scrutiny."
Separately, AT&T reported its financial results for the
third quarter on Saturday. Revenue rose 4.6% to $40.89 billion,
below the average analyst of $41.15 billion on Thomson Reuters. The
year-over-year increase largely reflected the DirecTV
acquisition.
Excluding DirecTV and foreign exchange, AT&T said revenue
was essentially flat, as growth in video and IP-based services
mostly offset pressures from declines in wireless and legacy
services.
Earnings increased to $3.33 billion, or 54 cents a share, from
$2.99 billion, or 50 cents a share. Excluding certain costs -- such
as those for amortization and integration -- AT&T had per-share
earnings of 74 cents, flat from the year-ago period and in-line
with the average analyst estimate on Thomson Reuters.
The company had been scheduled to report its earnings on
Tuesday. Along with its quarterly report, AT&T also raised its
quarterly dividend by 2.1%, to 49 cents from 48 cents, representing
its 33rd straight annual increase.
AT&T's purchase of Time Warner would be far and away the
biggest media deal of recent years, potentially breathing new life
into media deal-making. Time Warner had a market capitalization of
$68 billion before the Journal reported on the advanced talks
Friday, while AT&T's was $233 billion.
On Friday, Time Warner shares closed at $89.48, up 8%, while
AT&T fell 3%, to $37.49.
AT&T has been shifting its sights to media and video in
recent years, diving deeper into television after its nearly $50
billion deal to acquire satellite television provider DirecTV last
year. That made AT&T, which traces its roots to the old Ma Bell
telephone company, the country's biggest pay television provider
and its second-largest wireless operator.
Time Warner "is the last scaled content play that's acquirable,"
said Michael Nathanson, an analyst at MoffettNathanson, noting that
the rest of the major media companies are either so valuable they
would be difficult to acquire, such as Walt Disney Co., or family
controlled, such as 21st Century Fox, CBS Corp. and Viacom Inc.
"HBO, Turner and Warner Bros. are really good assets for a future
of nonlinear consumption."
The sale represents a strategic departure for Mr. Bewkes, who
spent his nearly nine years as CEO slimming down the onetime media
behemoth, unwinding the AOL merger and spinning out Time Warner
Cable and Time Inc. The three businesses that remained -- HBO,
Turner Broadcasting and Warner Bros. -- are focused solely on video
content. In lieu of acquisitions, Mr. Bewkes focused on containing
costs and buying back stock.
A cerebral Stanford M.B.A. known for his financial acumen, Mr.
Bewkes set a strategy that was influenced in part by scars from the
disastrous AOL-Time Warner merger, which left shareholders in the
combined company -- including employees such as Mr. Bewkes -- in a
lurch after AOL's business collapsed.
Much has changed in the media landscape since the AOL-Time
Warner marriage unraveled, Mr. Bewkes spun off Time Warner Cable
and even since he rebuffed Fox's takeover offer.
For Mr. Bewkes, selling now could turn out to be a shrewd bet,
given the uncertainty of the media business. Cord-cutting has so
far only been a relatively minor drag on industry results. It is
the threat of future disruption that is the most potent overhang on
media stocks, and it is unclear when the pace of change will
accelerate.
Within Time Warner, CNN is enjoying a huge viewership boost,
with a doubling of its ratings year-over-year because of interest
in the presidential election, but retaining that audience when the
political circus subsides will be a huge challenge.
Meanwhile, the company has long-term investments for the rights
to carry MLB and NBA games via TBS and TNT that have long looked
like sure bets, as sports have been more immune to ratings
pressure. But cracks have appeared in the NFL's viewership this
season, raising questions about whether sports TV may face a
reckoning. HBO continues to be a creative and financial juggernaut
but competition with Netflix Inc., Amazon.com Inc., Showtime, FX
and others to work with top talent is only intensifying by the
year.
If completed, Dallas-based AT&T would rely on television and
media for more than 40% of its revenue, based on second-quarter
financial results, strongly diversifying the company away from a
U.S. wireless business that has become increasing competitive.
Mr. Stephenson has been reshaping AT&T's strategy in recent
years, particularly since consolidation in the wireless sector
hasn't left room for major deals. AT&T's attempt to buy
T-Mobile was killed by regulators in 2011.
With its newfound scale from the DirecTV acquisition, AT&T
spent the past year aggressively negotiating deals with content
owners and plans to launch an over-the-top video service by year's
end, which would allow users to stream programming over the Web
without the need for a satellite dish. Owning Time Warner would
give AT&T assets that would help along those streaming media
ambitions.
For AT&T, the deal would eclipse DirecTV and may be its
biggest acquisition since paying $85 billion for BellSouth in 2006.
With $117.3 billion in long-term debt at the end of June, buying
Time Warner could give AT&T a huge 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, increases its total dividend costs, above the almost
$12 billion in current annual payouts.
George Stahl and Amol Sharma contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com, Keach Hagey at
keach.hagey@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and
Dana Mattioli at dana.mattioli@wsj.com
(END) Dow Jones Newswires
October 22, 2016 21:30 ET (01:30 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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