AT&T Mulls Reinvention for Web With $86 Billion Time Warner Deal
AT&T Mulls Reinvention for Web With $86 Billion Time
Warner Deal
By Gerry Smith and Lucas Shaw
October 22, 2016 — 12:01 AM EDT October 22, 2016 — 8:24
PM EDT
Merger accord could be reached Sunday, announced by
Monday
Time Warner Inc. and AT&T Inc. have survived the
evolution of color TV and cable over the decades. Now they’re merging to adapt
to the latest technological shifts: smartphones and streaming.
More consumers are getting their entertainment online
from Netflix Inc. and watching on iPhones instead of TVs. That’s putting
pressure on traditional entertainment companies and pay-TV providers. For many,
it’s no longer enough just to make TV shows or own a cable company.
“You need to do both,” said Chris Marangi, co-chief
investment officer at Gamco Investors Inc., which owns stock in both companies.
That logic is driving Dallas-based AT&T’s proposed
acquisition of Time Warner as two storied companies respond to changes
reshaping the entertainment industry in 2016. AT&T, founded in 1885, has
agreed to buy the parent of the 93-year-old Warner Bros. film studio for
$107.50 a share, or $85.4 billion, according to a statement on Saturday.
The transaction is valued at $108.7 billion including
Time Warner’s net debt. Once the deal closes, Time Warner shareholders will own
14.4 percent to 15.7 percent of AT&T shares. AT&T expects the deal to
be accretive in the first year and sees $1 billion in annual cost synergies
within three years of closing.
Pay-TV distributors like AT&T, the parent of DirecTV,
are trying to prevent subscribers from dropping their services for cheaper
online alternatives. They aim to own content they can offer wherever consumers
want, whether it’s streamed to mobile phones or broadcast on TV.
AT&T’s chief rival, Verizon Communications Inc., has
bulked up in a different way, opting for original programming designed
specifically to be viewed on smartphones for its mobile video service, Go90.
Verizon has been buying companies like AOL and Yahoo! Inc. to become a player
in the mobile advertising market.
New York-based Time Warner, which also owns CNN and HBO,
is a rich target for AT&T. The media company has a vast library of movies
and television series, such as the “Harry Potter” films and “Game of Thrones,”
and is among Hollywood’s most prolific producers. Its annual revenue totals $28
billion.
Pressure to Sell
AT&T’s interest “demonstrates the embedded value of
media content in distribution platforms,” said Steven Cahall, an analyst at RBC
Capital Markets.
The same industry pressures may explain Time Warner’s
willingness to sell -- two years after rejecting a buyout offer from 21st
Century Fox Inc. Time Warner, Walt Disney Co. and competitors like Viacom Inc.
are all confronting similar threats: falling TV ratings as consumers drop or
pare their cable-TV subscriptions for online alternatives.
The pay-TV distributors have been combining as well,
building negotiating leverage to rein in the price increases that media
companies seek for their TV networks. AT&T bought DirecTV last year for $48
billion, creating the biggest U.S. pay-TV service, while Charter Communications
Inc. struck a $56 billion deal to swallow up Time Warner Cable Inc. -- a former
unit of Time Warner.
“Time Warner is saying maybe there are limits to what
they can do as a standalone entity,” Marangi said. A deal between the company
and AT&T “could be the match that gets consolidation going on the content
side.”
Some deals are already in the works. CBS Corp. and Viacom
Inc., controlled by billionaire Sumner Redstone and his daughter Shari, are
considering recombining after more than a decade as separate companies. In
June, Lions Gate Entertainment Corp., the studio behind “Mad Men” and “The
Hunger Games,” agreed to buy the premium cable network Starz, beating out a
rival bidder -- AT&T.
Separately, both AT&T and Time Warner have been
responding to the consumer’s desire to watch more movies and TV shows online.
AT&T plans to unveil a new web-streaming TV service, DirecTV Now, that will
carry dozens of cable channels over the internet. Time Warner’s HBO last year
introduced an online version of its network for people who don’t want cable TV.
Unparalleled Scale
With Time Warner, AT&T would combine distribution and
production on a scale unparalleled in traditional media, potentially creating new
options. The phone giant already owns the second-biggest U.S. wireless network
and the largest U.S. pay-TV footprint. The deal would make it one of the
largest producers of entertainment as well.
Such a combination is certain to face intense regulatory
scrutiny. When it bought NBCUniversal, Comcast Corp. had to accept conditions
so it wouldn’t be too powerful in the burgeoning web TV landscape. NBC was
required to make all of its channels available to all new online TV entrants,
weakening its negotiating leverage.
The entertainment division also was barred from exerting
influence on the streaming service Hulu, which it partly owns. Hulu will soon
unveil an online TV offering that competes with Comcast’s conventional cable
service.
Analysts are divided over how valuable the NBC deal has
been for Comcast and whether it makes sense for AT&T to own TV networks and
production studios. While Comcast’s Universal film studio just had its best
year ever, the company’s cable business has lost subscribers and some of NBC’s
networks have seen audience ratings fall.
“None of the improvements in NBC have come from its
attachment to the cable business,” said Jonathan Chaplin, an analyst at New
Street Research.
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