AT&T To Buy Time Warner In $85.4 Billion Cash, Stock Deal

AT&T Inc. agreed to buy Time Warner Inc. for $85.4 billion, forming a telecommunications and media empire that will own many of the movies and TV shows it pumps through to subscribers of its wireless, internet and pay-TV services.

The cash-and-stock deal values Time Warner at about $107.50 a share, the companies said Saturday in a statement, 20 percent more than Friday's closing price. Time Warner shareholders are to receive $53.75 per share in cash and $53.75 a share in AT&T stock.

"This is a perfect match of two companies with complementary strengths who can bring a fresh approach to how the media and communications industry works," AT&T Chairman and Chief Executive Officer Randall Stephenson said in the statement.

The deal caps Stephenson's vision to expand AT&T into media and entertainment as its wireless business matures. Gaining premium cable channel HBO, CNN and the Warner Bros. studio means AT&T becomes a content owner rather than just a distributor of video.

"When we first discussed this we thought it might be unique enough and worthy of investigating whether we could put the two companies together and create something different," Stephenson said on a conference call Saturday night to discuss the deal. The negotiation process went fast, he said, adding that it had "a gravity to it."

Executive Meetings

Senior executives of the companies had met in recent weeks to discuss business strategies and an agreement was near as of Friday, Bloomberg reported, citing people familiar with the talks. The acquisition comes a little more than a year after Dallas-based AT&T became the largest U.S. pay-TV distributor when it completed its $48.5 billion purchase of satellite-TV provider DirecTV.

The transaction is valued at $108.7 billion including Time Warner's net debt. Once the deal closes, Time Warner shareholders will own between 14.4 percent and 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.

AT&T has commitments for a bridge loan of $40 billion to finance part of the cash portion of the deal, according to the statement. JPMorgan Chase & Co. is contributing $25 billion of the financing, with Bank of America Corp. providing the rest, according to a person familiar with the arrangement.

The proposed deal calls for Time Warner to pay about a $1.72 billion breakup fee, and AT&T to pay $500 million, a separate person said.

"This is going to supercharge our creative abilities, allow us to experiment more and it gives us more financial heft," Time Warner Chairman and CEO Jeff Bewkes said on the call. "I think it will attract more cutting-edge projects and talent, so we are going full steam ahead."

'Awkward Marriage'

"It was time to do a deal and Time Warner was available," Jonathan Chaplin, an analyst at New Street Research in New York, said in an interview before the transaction was announced. He has a neutral rating on AT&T's shares. "Time Warner offers a premier set of media assets; the only one that is bigger is Disney."

"A transaction of this magnitude obviously warrants very close regulatory scrutiny," a spokeswoman for Walt Disney Co. said.

Chaplin called the combination "an awkward marriage." AT&T, rooted in a century-old telecommunications system, is attempting to pair a more stodgy culture with one that has a distinctly more dynamic New York media and Hollywood mindset. One of the largest corporate employers in the country with some 281,000 workers at the end of last year, AT&T posted 2015 revenue of $146.8 billion. Time Warner, with almost 25,000 employees, reported revenue of $28.1 billion.

Time Warner's huge entertainment offering gives AT&T new revenue streams at a time when subscribers to traditional pay-TV are cutting the cord and switching to cheaper "skinny bundles" like Dish Network Corp.'s Sling TV or to online services such as Netflix Inc. and Amazon.com Inc. To keep its wireless customers from switching to lower-priced rivals T-Mobile US Inc. and Sprint Corp., AT&T has offered packages of unlimited mobile data and TV service. Time Warner will represent about 15 percent of the combined company's revenues.

The deal comes two years after Time Warner's Bewkes and his board rejected an $85-a-share offer from Rupert Murdoch's 21st Century Fox Inc., which valued Time Warner at the time at more than $75 billion.

Original Programming

In the interim, Bewkes has focused on creating must-see original programming and acquiring sports rights to draw TV viewers and extract higher fees from AT&T and other distributors such as Comcast Corp. Time Warner also owns a 10 percent stake in web-streaming service Hulu LLC, which it paid $583 million for earlier this year, according to people with knowledge of that deal.

Bewkes, 64, will stay at the combined company for a transition period after the deal, he said on a conference call Saturday. No specific time has been set for how long he'll stay.

On the call to discuss the deal, Bewkes acknowledged Time Warner's checkered dealmaking history, including its disastrous merger with America Online Inc. in 2000.

"Time Warner has been through many combinations, many historic," Bewkes said. "The first one Time and Warner, and then we added Turner, and then we did have a misstep of course with AOL. We are feeling very positive about this."

In the second quarter, Time Warner's Turner cable network had revenue of $3 billion, while HBO posted sales of $1.5 billion, and the Warner Bros. studio, producer of the "Harry Potter" franchise, "The Big Bang Theory" and DC Comics properties, had sales of $2.7 billion.

The merger is subject to approval by Time Warner shareholders as well as review by the U.S. Justice Department, and is expected to close by year-end 2017. Time Warner also has an airwaves license for a TV station in Atlanta, which could give the FCC jurisdiction to scrutinize the deal if that license is transferred to AT&T. They potentially could sell the station to escape FCC scrutiny.

'Blank Page'

The FCC's newer rules have restricted growth for carriers in the telecom world. That's driven them to integrate other businesses like television and media, Roger Entner, an analyst with Recon Analytics LLC in Dedham, Massachusetts, said in an interview before the deal was announced.

"The wildcard in all this will be the FCC," Entner said. "It's hard to predict what the regulators will do. They are pretty much starting with a blank page."

Click here for an explainer on potential antitrust hurdles the deal could face

Entner chimed in on how the U.S. presidential election results might affect the deal. He said if Hillary Clinton wins, the regulatory stance will be similar to what we have today.

Trump, before the agreement was announced, said Saturday that he would look to block the deal if elected. He said such media combinations leave too much power concentrated among too few companies, including ones he says are hostile to his presidential bid and rigging the election for Clinton.

The policy director of Free Press, a Florence, Massachusetts-based telecommunications advocacy group, said the proposed deal "would cost internet users and TV viewers dearly."

"Any time you hear media executives talking about synergies, throwing around the business-babble that always accompanies these rumors, you know it's time grab your wallet and hang on tight," Matt Wood said in an e-mail before the deal was announced.
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