By Keach Hagey, Dana Cimilluca and Shalini Ramachandran 

Two months ago, AT&T Inc. Chief Executive Randall Stephenson stopped by Time Warner Inc. Chief Executive Jeff Bewkes's offices in New York for a lunch of salmon, while musing about the increasing convergence of the media and telecommunications industries.

During their lunch, Mr. Stephenson surprised Mr. Bewkes by suggesting that AT&T buy Time Warner, according to people familiar with the matter. Mr. Bewkes said it wasn't for sale, but at the right price he would consider an offer, the people said, signaling that a deal was possible.

Mr. Stephenson walked away with his mind swirling with the possibilities that Time Warner's premium content -- top brands such as HBO, CNN and Warner Bros. -- could bring to the streaming video service he was trying to build.

"If you were ever going to do something like this, this is the content you'd like to use as an anchor tenant," he said in an interview Sunday.

From that point forward, things proceeded at breakneck speed, culminating Saturday night in the biggest deal of the year as AT&T announced it was buying Time Warner for $107.50 a share -- a 36% premium to where its stock was trading before the news of a deal started to trickle out late last week.

The $85.4 billion cash-and-stock deal will forge a conglomerate that both produces content and distributes it, uniting AT&T's millions of pay-TV and wireless customers with Time Warner's extensive cache of media content, including the prized HBO premium network, cable networks TBS and TNT, and the Warner Bros. film and TV studio.

The mammoth combination would mark the crowning achievements of both company's CEOs, technocrats less known for deal making earlier in their tenures. They said they expect the deal to close by the end of 2017, though it is likely to face a stringent regulatory review.

For Mr. Stephenson, the transaction could solidify his moving away from the U.S. wireless market -- where further consolidation was blocked in 2011 when regulators halted his attempted $39 billion purchase of T-Mobile US Inc. After buying DirecTV last year, this latest deal transforms the former regional telephone company into a major media conglomerate. He's betting that wading further into television and video will generate new sources of growth, and that buying Time Warner will provide a hedge against increasing programming costs.

"Premium content always wins. It has been true on the big screen, the TV screen and now it is proving true on the mobile screen," said Mr. Stephenson, who will lead the new company, according to a Saturday news release.

For Mr. Bewkes, a cerebral Stanford M.B.A. known for his financial acumen, the sale is considered a triumph after he walked away from an $85-a-share offer from 21st Century Fox Inc. two years ago, saying it undervalued his company. (21st Century Fox and Wall Street Journal-owner News Corp share common ownership.)

It also represents a strategic departure after he spent his nearly nine years as CEO slimming down the onetime media behemoth to focus on content, eschewing distribution businesses. He unwound the disastrous AOL merger and spun out the Time Warner Cable distribution business and Time Inc. magazines. Mr. Bewkes plans to stay for an interim period following the close of the deal to help with the transition.

From the time that AT&T agreed to purchase DirecTV in 2014 for $49 billion as part of a major shift toward video, analysts had expected the company to go after a media acquisition. In the spring, AT&T took a hard look at Starz, though it lost out to Lions Gate Entertainment Corp., which signed a deal at the end of June. In early August, the company decided to go after a bigger fish -- Time Warner, according to people familiar with the matter.

After Mr. Stephenson's lunch with Mr. Bewkes on Aug. 25, AT&T enlisted boutique investment bank Perella Weinberg Partners to work alongside its law firm, Sullivan & Cromwell LLP, according to people familiar with the matter.

Around early September, Time Warner brought in boutique investment bank Allen & Co. to work with its law firm Cravath, Swaine & Moore LLP. Discussions concerning due diligence and price took place last month, according to people familiar with the situation.

By the middle of this month, the two companies had a "handshake deal," the people said, and bigger banks were brought in. J.P. Morgan Chase & Co. was hired to help AT&T with financing, while Bank of America Corp. came in shortly before the deal was signed to round out a bridge loan. Time Warner brought in Citigroup Inc. and Morgan Stanley around the weekend before the agreement was announced. The deal teams hammered out final details in Sullivan & Cromwell's Midtown Manhattan offices throughout the past week.

Part of the need for speed came from pressure from other bidders. Tech giants including Apple kicked the tires on Time Warner as recently as a few months ago, and Apple Inc. continues to monitor the situation, according to people familiar with the matter.

Time Warner has agreed to pay a $1.7 billion breakup fee if another company outbids AT&T's offer, said a person familiar with the plans. AT&T, meanwhile, would pay $500 million if the deal gets blocked, this person said.

Time Warner and AT&T said they aim to be the first U.S. wireless company to compete nationwide with cable firms by providing an online-video bundle akin to a traditional pay-TV package. With its newfound scale from the DirecTV acquisition, AT&T has spent the past year aggressively negotiating deals with content owners so it can launch the DirecTV Now over-the-top video service by year's end. "It will disrupt the traditional entertainment model and push the boundaries on mobile content availability for the benefit of customers," the companies said.

--Thomas Gryta contributed to this article.

 

(END) Dow Jones Newswires

October 23, 2016 19:56 ET (23:56 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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