Deal puts AT&T in movie, TV production

CEO reaches goal with Time Warner purchase, but tough scrutiny still to come

AT&T Inc.'s agreement to buy Time Warner Inc. for $85.4 billion would form a media and telecommunications empire that owns many of the movies and TV shows it pumps through to subscribers, provided that regulators sign off on a deal at a time when they and lawmakers have grown skeptical of media consolidation.

The deal caps AT&T Chairman and Chief Executive Officer Randall Stephenson's vision to expand into media and entertainment as his company's wireless, Internet and pay-TV services businesses mature. 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 -- giving it extra reach amid disruptive changes in the ways that viewers decide what, and how, to watch.

"Having scale, reach and diversity of assets might offer the greatest protection of all," said Walt Piecyk, an analyst at BTIG LLC in New York.

That scale also may invite extra regulatory scrutiny to the deal. The pairing faces a potentially rocky path through Washington as the Democratic and Republican presidential nominees both express suspicion of blockbuster transactions.

The consolidation of media into fewer empires also has renewed concerns over the fairness and freedom of tomorrow's entertainment. Telecom gatekeepers such as AT&T could steer customers to their own offerings, muscling out independent artists and limiting choice. Or they could exclude noncustomers, forcing curious audiences to subscribe or go without.

"You have a big distributor owning some of the largest networks. Is everyone going to have equal access to those networks?" said Eric Handler, a media and entertainment analyst for MKM Partners.

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 a share in cash and $53.75 a share in AT&T stock. The transaction is valued at $108.7 billion, including Time Warner's net debt.

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.

"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 world of digital media is now evolving so rapidly that it no longer makes sense to continue negotiating for Time Warner's content rights at a distance, Stephenson added.

Jonathan Chaplin, an analyst at New Street Research in New York, 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.

Political Environment

Cultural distinctions aside, the marriage is also sure to prompt close review by regulators and by rivals, some of whom may now be compelled to consider deals of their own. 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.

Republican presidential candidate Donald Trump, who has complained about concentration of power at media companies, said Saturday that he would look at blocking the combination if elected. Democratic nominee Hillary Clinton's running mate, Sen. Tim Kaine of Virginia, said on NBC's Meet the Press that he shared "concerns and questions" raised by fellow Sen. Al Franken, D-Minn.

Franken, who sits on the Senate Judiciary Committee, said in a statement on Saturday that huge media mergers "can lead to higher costs, fewer choices, and even worse service for consumers."

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

Verizon, AT&T's biggest rival in the wireless industry, has made its own moves toward gaining access to content. But some analysts say the outlook for Verizon is beginning to look gloomier as AT&T barreled to a deal with Time Warner on Saturday.

"You've got the big-league players, and you've got the second-string players," said Jeff Kagan, an independent telecom analyst. "Verizon -- the moves they've made, they make it look more like a second-string player."

A Verizon spokesman didn't respond to a request for comment.

Verizon has made headlines recently with its acquisitions of AOL and Yahoo, both pioneers of the early Internet, which later fell on hard times.

What Verizon gets out of AOL and Yahoo may pale in contrast to what AT&T is now getting with Time Warner, a media titan that includes a major movie studio; a global, 24/7 cable news network; and rights to some of the most recognizable names in pop culture, such as Batman, Superman and Harry Potter.

"It's hard to compare what Verizon has bought ... with the quality of what Time Warner offers," Piecyk wrote in a research note Saturday. "In fact, Verizon bought the AOL asset that Time Warner didn't want. There is no indication Verizon's strategy will change and frankly few, if any, alternatives that remain."

Yahoo's disclosure in September of a data breach affecting at least 500 million user accounts has cast a big cloud over Verizon's purchase. That news was further compounded when the public learned that top Yahoo executives had secretly worked with intelligence officials to scan customer emails -- without the knowledge of its chief information security officer, who quit the company in protest when he discovered the arrangement.

Deal Terms

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.

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. "It will attract more cutting-edge projects and talent, so we are going full steam ahead."

The rapid reshaping of technology and consumer preference has undermined the telecom industry's traditional moneymakers, such as cable and wireless subscriptions. Many viewers are swearing off cable packages, streaming shows over the Web to their phones or computers, and spending time on games, social media or on-demand video outside the traditional structure of linear TV.

Owning media that keep people engaged through the life of a weekly TV series, or every day through a video game, would give a company like AT&T an exclusive hook to ensure that subscribers keep coming back.

Time Warner's huge entertainment offering potentially gives AT&T new revenue streams.

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 revenue.

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.

In the interim, Bewkes has focused on creating 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, for which it paid $583 million 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. He 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.

Information for this article was contributed by Gerry Smith of Bloomberg News and by Brian Fung, Christian Davenport and Drew Harwell of The Washington Post.

A Section on 10/24/2016

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