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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