The telco agreed to pay $107.50 a share, half cash and the other half in stock. That comes to $85.4 billion, or $108.7 billion if you include Time Warner’s debt.
When it’s done, Time Warner shareholders will own as much as 15.7% of AT&T. The entertainment assets will account for about 15% of AT&T’s revenues.
They expect the deal to close by the end of next year following an antitrust review by the Justice Department. The FCC also likely will pay a role in the process although AT&T and Time Warner say that they are “currently determining which FCC licenses, if any, will be transferred to AT&T in connection with the transaction.”
Time Warner Sale To AT&T Shows Distribution, Not Content, Is King
The partners say that the merged company will become the “first U.S. mobile provider to compete nationwide with cable companies in the provision of bundled mobile broadband and video.”
They also intend to “deliver more innovation with new forms of original content built for mobile and social, which builds on Time Warner’s HBO Now and the upcoming launch of AT&T’s OTT offering DirecTV Now.”
Time Warner CEO Jeff Bewkes said in a conference call that he’ll depart after a transition period, leaving AT&T chief Randall Stephenson in charge. “We’re going to figure it out together how long I should be part of that. It is probably a reasonable period of time…I’m planning to do this as long as I can help the company.”
The telco chief called the arrangement “open-ended.” The Time Warner CEO will be sure that “we have the right people in the right seats.”
Bewkes added that he expects “all of our creative and business execs to go on for many years.”
Asked specifically about the role Peter Chernin will play, Stephenson said that he “doesn’t have any idea what Peter’s plans are.” The Hollywood exec “has his hands full right now” — including at Otter Media, his programming joint-venture with AT&T.
The AT&T CEO calls this a “perfect match” by uniting “the world’s best premium content with the networks to deliver it to every screen.”
But the companies were vague about benefits consumers would see.
Bewkes noted that it will be easier to change distribution practices by putting the two companies under one roof. For example, he said that cable companies were slow to roll out video on demand.
“They basically kept their VOD rights hostage to individual negotiations and contract renewals,” he says. “That’s not a way to bring a revolution to consumers.”
Execs also say that they’ll make it easier for people to search for programming, and will give them a broader variety of subscription packages. Bewkes says that the merged company will find ways to have advertisers foot more of the costs to provide entertainment.
“That can be a win-win,” he says. “We all like advertising messages if the thing we’re seeing is relevant to us. Think of a magazine. You don’t want a magazine with no ads….That’s how we got to the view that this would be a real game changer.”
Time Warner is on the hook to pay AT&T $1.7 billion if the entertainment company receives, and wants to take, a higher offer, the Wall Street Journal says. If the partners stay together but federal regulators oppose the union, then AT&T has to pay $500 million to Time Warner.
AT&T will finance the acquisition with a $25 billion loan from J.P. Morgan Chase and another $25 billion from Bank of America Merrill Lynch. It also can tap $40 billion from an unsecured bridge loan.
The company expects the deal to result in $1 billion in annual cost savings within three years as well as “incremental revenue opportunities that neither company could obtain on a standalone basis.”
Bewkes and Stephenson began talking seriously about a merger in late August as they compared notes about media convergence.
“We began to discuss, at first philosophically, and then the more we talked about it the more it fell into place,” Bewkes says.
Stephenson denied that he moved quickly on the negotiations because other companies were kicking Time Warner’s tires. Time Warner “wasn’t up for sale,” he says. Bewkes added that “we don’t have any activity like that.”
Here’s the announcement:
AT&T Inc. (NYSE:T) and Time Warner Inc. (TWX) today announced they have entered into a definitive agreement under which AT&T will acquire Time Warner in a stock-and-cash transaction valued at $107.50 per share. The agreement has been approved unanimously by the boards of directors of both companies.
The deal combines Time Warner’s vast library of content and ability to create new premium content that connects with audiences around the world, with AT&T’s extensive customer relationships, world’s largest pay TV subscriber base and leading scale in TV, mobile and broadband distribution.
“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 for customers, content creators, distributors and advertisers,” said Randall Stephenson, AT&T chairman and CEO. “Premium content always wins. It has been true on the big screen, the TV screen and now it’s proving true on the mobile screen. We’ll have the world’s best premium content with the networks to deliver it to every screen. A big customer pain point is paying for content once but not being able to access it on any device, anywhere. Our goal is to solve that. We intend to give customers unmatched choice, quality, value and experiences that will define the future of media and communications.
“With great content, you can build truly differentiated video services, whether it’s traditional TV, OTT or mobile. Our TV, mobile and broadband distribution and direct customer relationships provide unique insights from which we can offer addressable advertising and better tailor content,” Stephenson said. “It’s an integrated approach and we believe it’s the model that wins over time.
“Time Warner’s leadership, creative talent and content are second to none. Combine that with 100 million plus customers who subscribe to our TV, mobile and broadband services – and you have something really special,” said Stephenson. “It’s a great fit, and it creates immediate and long-term value for our shareholders.”
Time Warner Chairman and CEO Jeff Bewkes said, “This is a great day for Time Warner and its shareholders. Combining with AT&T dramatically accelerates our ability to deliver our great brands and premium content to consumers on a multiplatform basis and to capitalize on the tremendous opportunities created by the growing demand for video content. That’s been one of our most important strategic priorities and we’re already making great progress — both in partnership with our distributors, and on our own by connecting directly with consumers. Joining forces with AT&T will allow us to innovate even more quickly and create more value for consumers along with all our distribution and marketing partners, and allow us to build on a track record of creative and financial excellence that is second to none in our industry. In fact, when we announce our 3Q earnings, we will report revenue and operating income growth at each of our divisions, as well as double-digit earnings growth.
Bewkes continued, “This is a natural fit between two companies with great legacies of innovation that have shaped the modern media and communications landscape, and my senior management team and I are looking forward to working closely with Randall and our new colleagues as we begin to capture the tremendous opportunities this creates to make our content even more powerful, engaging and valuable for global audiences.”
Time Warner is a global leader in media and entertainment with a great portfolio of content creation and aggregation, and iconic brands across video programming and TV/film production. Each of Time Warner’s three divisions is an industry leader: Turner consists of U.S. and international basic cable networks, including TNT, TBS, CNN and Cartoon Network/Adult Swim, and has sports right that include the National Basketball Association, NCAA Men’s Championship Basketball Tournament, and Major League Baseball; HBO, which consists of domestic premium pay television and streaming services (HBO Now, HBO Go) featuring such original series as Game of Thrones, VEEP, and Silicon Valley, as well as international premium & basic pay television and streaming services; and Warner Bros. Entertainment, which consists of television, feature film, home video and videogame production and distribution. Film franchises include Harry Potter, DC Entertainment, and LEGO; TV series produced include The Big Bang Theory, The Voice, and Gotham. Time Warner also has invested in over-the-top and digital media properties such as Bleacher Report, Hulu and Machinima.
The new company will deliver what customers want — enhanced access to premium content on all their devices, new choices for mobile and streaming video services and a stronger competitive alternative to cable TV companies.
With a mobile network that covers more than 315 million people in the United States, the combined company will strive to become the first U.S. mobile provider to compete nationwide with cable companies in the provision of bundled mobile broadband and video. It will disrupt the traditional entertainment model and push the boundaries on mobile content availability for the benefit of customers. And it will deliver more innovation with new forms of original content built for mobile and social, which builds on Time Warner’s HBO Now and the upcoming launch of AT&T’s OTT offering DIRECTV NOW.
Owning content will help AT&T innovate on new advertising options, which, combined with subscriptions, will help pay for the cost of content creation. This two-sided business model — advertising- and subscription-based — gives customers the largest amount of premium content at the best value.
Summary Terms of Transaction
Time Warner shareholders will receive $107.50 per share under the terms of the merger, comprised of $53.75 per share in cash and $53.75 per share in AT&T stock. The stock portion will be subject to a collar such that Time Warner shareholders will receive 1.437 AT&T shares if AT&T’s average stock price is below $37.411 at closing and 1.3 AT&T shares if AT&T’s average stock price is above $41.349 at closing.
This purchase price implies a total equity value of $85.4 billion and a total transaction value of $108.7 billion, including Time Warner’s net debt. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
The cash portion of the purchase price will be financed with new debt and cash on AT&T’s balance sheet. AT&T has an 18-month commitment for an unsecured bridge term facility for $40 billion.
Transaction Will Result in Significant Financial Benefits
AT&T expects the deal to be accretive in the first year after close on both an adjusted EPS and free cash flow per share basis.
AT&T expects $1 billion in annual run rate cost synergies within 3 years of the deal closing. The expected cost synergies are primarily driven by corporate and procurement expenditures. In addition, over time, AT&T expects to achieve incremental revenue opportunities that neither company could obtain on a standalone basis.
Given the structure of this transaction, which includes AT&T stock consideration as part of the deal, AT&T expects to continue to maintain a strong balance sheet following the transaction close and is committed to maintaining strong investment-grade credit metrics.
By the end of the first year after close, AT&T expects net debt to adjusted EBITDA to be in the 2.5x range.
Additionally, AT&T expects the deal to improve its dividend coverage and enhance its revenue and earnings growth profile.
Time Warner provides AT&T with significant diversification benefits:
Diversified revenue mix — Time Warner will represent about 15% of the combined company’s revenues, offering diversification from content and from outside the United States, including Latin America, where Time Warner owns a majority stake in HBO Latin America, an OTT service available in 24 countries, and AT&T is the leading pay TV distributor.
Lower capital intensity — Time Warner’s business requires little in capital expenditures, which helps balance the higher capital intensity of AT&T’s existing business.
Regulation — Time Warner’s business is lightly regulated compared to much of AT&T’s existing operations.
The merger is subject to approval by Time Warner Inc. shareholders and review by the U.S. Department of Justice. AT&T and Time Warner are currently determining which FCC licenses, if any, will be transferred to AT&T in connection with the transaction. To the extent that one or more licenses are to be transferred, those transfers are subject to FCC review. The transaction is expected to close before year-end 2017.
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