October 2016

AT&T Dreams of a Hollywood Ending

AT&T is buying Time Warner to help it succeed in the future world of media consumption. In many ways, it already is living in that world, and it isn’t doing all that well. That alone is an important warning sign of the risk the telecom company is taking.

AT&T’s deal to buy Time Warner for $85.4 billion in cash and stock marks the wireless carrier’s second major bet in as many years on beefing up its exposure to the pay-TV ecosystem. With DirecTV, AT&T became the country’s largest pay-TV distributor. With Time Warner, it would become the owner of some of TV’s most popular networks and programming. Both target companies achieved their dominance in the world of traditional pay TV. AT&T, which is preparing to launch an Internet TV service, hopes to use those assets to be ready for a world where people predominantly watch video online and on their mobile devices. Still, there is no guarantee that future will be as lucrative as pay TV’s past, and that could erode the value of AT&T’s purchases. If that future is anything like the present for AT&T, it will be hard for the company to justify the price of the deal. AT&T has lost 200,000 video customers in the past year, despite the purchase of DirecTV last July. That could be a sign of things to come for Time Warner, as it tries to grow sales of its content to pay-TV providers. AT&T’s strategy is also far bolder than that of rival Verizon. The latter has chosen to tackle the wireless problem by pursuing a lower-risk strategy of growth through short-form video, funded by Internet advertising. That means a failure for Verizon would be less costly. To justify its purchase of Time Warner to investors, AT&T needs a Hollywood ending.

AT&T-Time Warner Deal Is Mostly About Defense

AT&T and Time Warner are suiting up for the Great Media Game. Their strategy to win is more about defense than offense. The strongest case for the gargantuan merger is that it is a hedge against a future where the first point of entry for a media consumer might be Netflix, Facebook, YouTube or Hulu, just as easily as a cable or telecom company. AT&T’s $50 billion acquisition of DirecTV tethered the telecom giant to a pay-TV business that has begun to decline and could be in store for serious pain if cord-cutting accelerates.

The good news for AT&T, Comcast, and others is that consumers will still need broadband subscriptions to sign up for their favorite streaming services. Now, with the Time Warner deal, there will be another hedge for AT&T: Any emerging streaming platform will need to license content from the big media conglomerates to survive. Time Warner won’t likely be left out of any aspiring “skinny” online TV bundle from Google, Amazon or Apple, or TV-like platform on social media, be it via Facebook, Snapchat or Twitter. (A side benefit: AT&T will take on Time Warner’s 10% ownership of Hulu alongside Comcast, Walt Disney and 21st Century Fox)

AT&T, Verizon Make Differing Bets as Wireless Growth Stalls

Faced with the same saturated wireless market, the nation’s two biggest telecom companies have placed divergent bets on the future. With its $85 billion agreement to buy Time Warner , AT&T has turned to television while Verizon has looked to Silicon Valley, with its $4.4 billion purchase of AOL in 2015 and pending $4.8 billion acquisition of Yahoo. Both operators are trying to solve the same riddle—each with a different piece of the ill-fated 2001 merger of AOL-Time Warner. They both have millions of wireless subscribers who pay monthly fees to use their networks to share photos, watch videos and tap into social networks. But that wireless business alone lacks the means to drive growth now that the majority of Americans have a smartphone. At the same time, their two smaller rivals are chipping away at their subscriber base.

The Making of the AT&T-Time Warner Deal

Two months ago, AT&T Chief Executive Randall Stephenson stopped by Time Warner 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, Stephenson surprised Bewkes by suggesting that AT&T buy Time Warner, apparently. Bewkes said it wasn’t for sale, but at the right price he would consider an offer, apparently, signaling that a deal was possible.

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. From that point forward, things proceeded at breakneck speed, culminating 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 during the week of Oct 17.

AT&T’s Wireless Leap Over Obama

The Federal Communications Commission’s 2015 power grab over the Internet is premised on the need for government to allocate broadband scarcity. So much for that. AT&T’s $85.4 billion weekend bid to buy Time Warner is the latest bet, and a very big one, that technology is making wireless broadband ubiquitous despite regulatory obstacles. The real threat to this new era of competition is the President Barack Obama-era FCC.

FCC Chairman Tom Wheeler justified his application of horse-and-buggy Title II regulation on grounds that government needed to drive broadband distribution. Bureaucracies rarely admit mistakes, so the Wheeler FCC might block the AT&T-Time Warner merger merely to prevent a market demonstration that the agency’s regulatory intervention is unnecessary. Yes, bureaucratic actors really can be that self-interested. One business issue worth mentioning is AT&T’s rising debt load to execute the purchase. The company says it has a $40 billion bridge loan commitment over 18 months to finance the cash portion of its half-stock, half-cash offer for Time Warner. But AT&T already has more than $120 billion in debt from its previous acquisitions, and its Standard & Poor’s bond rating is BBB+, close to the edge of investment grade. A downgrade to junk status could raise the company’s borrowing costs considerably. AT&T CEO Randall Stephenson had better hope the combined company’s cash flow can work down that debt burden while the Federal Reserve keeps interest rates at historic lows. Stephenson is making a big play on the wireless future, and his legacy as CEO will depend on how it works out. In a better world, the Obama Administration would see all of this as evidence that Chairman Wheeler’s Internet gatekeeping is misguided and rewrite its Title II supervision. Alas, that will take an end to progressive rule in Washington.

Time Warner Deal Adds to AT&T’s Heavy Debt Load

Buying Time Warner will make AT&T among the most heavily indebted companies on earth. In a deal announced Oct 22, AT&T agreed to pay $85.4 billion to buy the owner of CNN, HBO and TNT networks. Including debt, the value grows to $108.7 billion. And to finance the half-cash, half-stock deal, AT&T is taking on $40 billion of bridge loans.

AT&T, the largest nonfinancial corporate issuer of dollar-denominated debt, already has about $119 billion in net debt—roughly double what it was five years ago. “This would put them, I think, within striking distance of the financials with respect to unsecured bond issuance,” says Mark Stodden, a credit analyst at Moody’s. Stodden estimates the carrier’s total debt load will grow to as much as $170 billion if the deal is approved. AT&T hasn’t said precisely how much debt it plans to issue to fund the transaction, but estimates that by the end of the first year after the deal’s close, net debt will be around 2.5 times its adjusted earnings, up from 2.24 times at the end of the third quarter. Most recently, AT&T added to its debt when it bought the satellite-television operator DirecTV in 2015. It also paid $18 billion for wireless airwaves licenses during a 2015 government auction and spent roughly $10 billion buying its own shares in 2014. More spending is on the horizon tooas the carrier is currently participating in a government auction of wireless airwaves.

AT&T says it plans to keep top Time Warner managers

Most media mergers end with the old regime getting shoved out the door. But AT&T’s top executive says he plans to keep in place much of Time Warner’s management team.

AT&T unveiled its blockbuster $84.5-billion acquisition of Time Warner this weekend, and the heads of both companies — AT&T Chairman and Chief Executive Randall Stephenson and Time Warner Chairman and Chief Executive Jeffrey Bewkes — quickly said that maintaining the executive ranks of the media company would be a priority. “I made it clear to Jeff that the talent that he assembled was a really important part of this deal,” Stephenson said. “And it was going to be really critical that we have continuity in the team that he has built.” Senior Time Warner executives — including Warner Bros. Chairman Kevin Tsujihara in Burbank (CA), HBO Chairman Richard Plepler in New York, and Turner Chairman John Martin in New York -- should be breathing easier. And Bewkes expects to hang around for some time, too. “We have both been really focused on keeping all of the Time Warner executives — the business executives and the creative executives — going forward for the long term,” Bewkes said.

AT&T looks to the vertical integration model to deliver returns

Steve Case took to Twitter when he heard about AT&T’s proposed $85.4 billion takeover of Time Warner, coining a new hashtag: #DejaVu. The former chief executive of AOL knows a few things about buying Time Warner, having led the $164 billion purchase of the media company in 2000 in a deal widely regarded as the worst ever, given that it was swiftly followed by a $100 billion writedown. There is little chance of history repeating itself, despite Case’s wry tweet.

Randall Stephenson, AT&T’s chairman and chief executive, did not go into details about how he planned to turbo-charge Time Warner’s film and television programming but he made clear that it would help the company sell new products and services. “When we combine Time Warner content with our scale and distribution … we’re going to have something really special,” he said. It is unclear what that combination will look like. Stephenson said AT&T would be able to innovate more rapidly by owning its own content yet the company will still need to strike other licensing deals if the direct to consumer mobile and digital offerings it is planning are to be comprehensive. For example, an AT&T that owns Time Warner can offer classic cartoons from the Cartoon Network but none from Walt Disney. It can offer cable news from CNN but would need a separate licensing deal to also offer Fox News, which is owned by Rupert Murdoch’s 21st Century Fox. It can boast superheroes from DC Entertainment but will need an additional deal if it is to offer Iron Man, Captain America and The Avengers, which are owned by Disney’s Marvel Studios. The point is that vertical integration can only do so much.

AT&T confident of approval for $85 billion Time Warner buyout

AT&T has promised to use its proposed $85.4 billion purchase of Time Warner to revolutionise mobile entertainment as it unveiled a deal that will unite companies instrumental in the creation of the communications industry, provided it is approved by regulators. The cash and stock deal, worth $107.50 a share, brings together the telephony pioneer started by Alexander Graham Bell with an entertainment group that has its roots in the early days of Hollywood. The acquisition faces at least a year of scrutiny from US competition regulators and possible objections from rival content groups fearful of the combined entity’s market power.

Randall Stephenson, AT&T’s chief executive expressed confidence that regulators would approve the acquisition, saying there was no overlap between the two businesses. “This is not a horizontal deal. This is vertical merger. You would be hardpressed to find examples where vertical mergers have been blocked.” Time Warner has agreed to pay a $1.7 billion break-fee to AT&T if it opts to sell to another buyer while AT&T will pay Time Warner $500 million if regulators block the deal, apparently.

Here’s why it doesn’t make sense for AT&T to own Time Warner

AT&T wants to buy Time Warner, and Wall Street, predictably, obliged, sending Time Warner shares up and AT&T stock down. Too bad the deal doesn’t make much sense. (Similarly, it doesn’t make sense for Apple to own Time Warner, either, which we’ll get to further down.) Here’s why: A company that owns pipes, whether over the air or through the ground, doesn’t actually benefit from owning the content flowing through those pipes.

Time Warner, which owns HBO, CNN, Warner Bros. and a lot of sports rights via Turner, loses its value if it can’t sell its content to every possible distributor, including AT&T’s main rivals, such as Comcast and Verizon. AT&T knows this (or should), but since the company’s been saddled with a price war (thanks to T-Mobile and Sprint), it’s been looking for new ways to increase growth. As part of that effort, it completed its $49 billion acquisition of DirecTV in 2015, a deal that actually makes sense since it allows AT&T to upsell both services to the respective customers, as well as potentially making both stickier. Even then, fewer people today are buying TV subscriptions from satellite providers (long known as the cheaper option to cable), since they can now get a lot from Netflix and Hulu and Amazon.

Benton

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