AT&T Inc. (NASDAQ T:NYQ)—market cap as of 28/10/16: $224.61bn
Time Warner Inc. (NASDAQ TWX:NYQ)—market cap as of 28/10/16: $68.04bn
Introduction
On October 22, 2016, AT&T Inc. announced the acquisition of Time Warner Inc. in a stock and cash transaction valued at $108.7bn including Time Warner’s $23.3bn Net Debt. AT&T will pay $107.50 per share to Time Warner, which includes a premium of 52.5% on Time Warner’s $89.5 closing share price on October 21st.
The acquisition, which represents the largest deal of 2016, has been unanimously approved by the boards of directors of both companies and it is expected to trigger strong revenue synergies and greater efficiencies. According to Jeff Bewkes – Time Warner’s CEO – the company will be able to leverage on AT&T’s platform to deliver high quality contents and consolidate the value of its brand. The acquisition is the effect of the company’s need to find new and more powerful distribution channels. The completion date is expected to be by the end of 2017.
AT&T Inc.
AT&T Inc. (NASDAQ T:NYQ) is the largest communications holding company in the world. Headquartered in San Antonio, Texas, it was founded in 1875 under the name of American Telephone and Telegraph Corporation. AT&T operates mainly through four business segments: Business Solutions, Entertainment Group, Consumer Mobility and International. The company is regarded to be the world leading provider of IP-based communication services and the leader in the US for high-speed Internet, wireless connection, and long-distance voice services.
In a wave of consolidation of the industry, AT&T has completed the acquisition of Cellular Properties Inc. (January) and QuickPlay Media Inc. (May) in 2016.
In 2015, AT&T reported Revenues for $146.8bn showing a 10.8% increase with respect to 2014, while net income improved by 107.2% from $6.4bn to $13.4bn.
Time Warner Inc.
Time Warner Inc. (NASDAQ TWX:NYQ), previously known as AOL Time Warner, is a US media and entertainment company. The company was created as a result of the merger between Time Inc. and Warner Communications in 1990 and is now headquartered in New York City.
It is mainly focused on three lines of business: Turner, offering cable networks and digital media services; Home Box Office, its premium pay television and streaming service; and Warner Bros., dealing with filmed entertainment and distribution of home video and videogames.
Time Warner managed to establish industry-leading brands across all the main platforms primarily through growth, engagement and monetization. Its products span from Harry Potter to the CNN. HBO, which is the oldest operating pay television service in the US, owns some of the most popular TV series of all times like Sex and the City, Game of Thrones and the newly released Westworld.
The company’s revenues amounted to $28.1bn in 2015, with a 2.8% increase from 2014, whilst there was virtually no change in Net Income with respect to the previous year ($3.83bn). The company has an operating margin of 25.3% and delivers a 16.7% return on equity to its shareholders.
Deal Structure
AT&T will pay $107.5 per each Time Warner’s share, 50% in cash and 50% in stock. The deal will have a total equity value of $85.4bn and an Enterprise Value of $108.7bn considering Time Warner’s net debt. Following the merger Time Warner will represent c. 15% of the combined entity. Time Warner has accepted to pay a $1.7bn break-up fee in case it decides to accept another bid, while AT&T will pay a $500m reverse break-up fee if the merger does not complete.
The deal will be financed with bank debt and cash on hand. According to regulatory filings a $40bn bridge facility is committed by J.P. Morgan ($25bn) and BofA Merrill Lynch ($ 15bn). The deal values Time Warner at 13x its EBITDA, a higher multiple than any of the major media stocks and it is also above most comparable transactions, including Comcast’s acquisition of NBCUniversal in 2013.
Deal Rationale
Should AT&T acquire Time Warner, both media and telecommunications capabilities would gather around the new entity. AT&T could use its distribution potential to distribute Time Warner’s content.
The new deal, at least from the acquirer’s perspective, is a natural progression of the acquisition of DirecTV made last year. Ideally, the addition of Time Warner’s content will benefit AT&T’s “over-the-top” services (OTT) – the delivery of audio, video and media over the internet.
This rationale is further strengthened by the fact that the media market is mature and does not offer many internal growth opportunities. On the other side, we are seeing companies like Netflix clearly gaining market share from the traditional cable TV firms, especially in US. Consumers are opting for online video instead of traditional televisions because they prefer to pay less, with the possibility of watching programs on their own schedule. Hence, combining content and network makes sense for AT&T if we also consider that this may guarantee growth in revenues and earnings as well as an improvement in the dividend coverage ratio as forecasted by the acquiring company.
Political Reactions and Most Likely Scenario
It seems like this proposed deal have succeeded in letting Mrs. Clinton and Mr. Trump agreeing on something, at least judging by the first reactions of the two candidates to the forthcoming US presidential elections. However, Mrs. Clinton reaction, talking about an “expected thorough analysis” looks much more diplomatic than the one of Mr. Trump, who said that “deals like this destroy democracy”.
It is worth noting that the field of politics, generally hot-blooded for its endogenous nature, literally burns into flames during the election campaign. It is also evident that attacking a multi-billions takeover has a better payback in the short time than discussing it in the merits with a cool-headed approach. In this environment, it is on the writer to extinguish the fire and try to give as much an objective interpretation as possible.
The AT&T – Time Warner deal is a vertical agreement, involving firms at different levels of the supply chain, which do not compete against each other. Therefore, despite the existence of some concerns, such as AT&T using its network to favour Time Warner’s content, there is not much of a case for the anti-trust authorities. On the contrary, it is more likely that such an acquisition could in fact be procompetitive, as pointed out by the two companies, providing customers with “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”.
AT&T – Time Warner vs. Comcast – NBCUniversal
In 2009, the global mass media conglomerate Comcast offered to buy 51% of NBCUniversal, valued at around $30bn, in a transaction that received regulatory clearance only in 2011. Two years later, Comcast bought the remaining shares to acquired complete ownership of NBCU. Comcast tried to further expand its media empire in early 2015 in a $45bn merger with Time Warner Cable, a move that was blocked by the US Justice Department. Now, as AT&T blockbuster acquisition of Time Warner will likely face thorough antitrust and Federal Communications Commission scrutiny, the massive joining of Comcast and NBCU comes as a reminiscence. In particular, it is interesting to compare these two deals under three points of view: price, integration, and public reception.
Between 2009 and today, market conditions have widely changed, heavily influencing the transaction value. Concluding the deal in October 2009, Comcast acquisition came in the aftermath of the 2008 financial crisis. As the economy was at a low point, NBCU was underperforming and was therefore undervalued. At the time, Time Warner was valued at $28 per share, compared to the $107.50 that AT&T has agreed to pay. Consequently, it is likely that it will require more effort by AT&T to realize the stated benefits of its deal.
Despite paying very different prices, both the transactions can be defined as a tentative to vertically integrate the business. AT&T and Comcast deliver content through wireless, cable and broadband services. Differently, Time Warner and NBCU produce content. Hence, the two parties in the transaction do not directly compete with each other, and a union of the two would theoretically not harm competition or the consumers.
Nonetheless, the general public has not welcome either of the deals. The mergers have been met with scepticism by regulators and outrage by consumers. Both AT&T and Comcast have promised to reduce their prices on the consumers, leveraging on their newly acquired power over content to impose higher prices on advertisers. However, five years after the first acquisition, Comcast’s service prices have not changed much. This is why consumers are looking with suspicion at the recently announced deal, in the hope that not only antitrust bodies, but also the FCC will unrelentingly scrutinize the transaction to protect the customers’ interests.
Market Reaction
Traders and investors remain skeptical that the deal will go through. As of Friday 28th October, a week after the announcement, Time Warner’s shares closed at $87.47, implying a 19% discount with respect to the offer price. Concerns about the transaction also affected AT&T’s stocks, which plunged 2.61% this week. Moreover, on Monday, Moody’s announced it had put AT&T under review for a possible downgrade to the second-lowest investment-grade rating. Indeed, after the merger, the company will add up $40bn of new debt and it will carry the total debt to $70bn, requiring interest payments of $9bn per annum from 2018. Therefore, AT&T’s bonds experienced a sharp sell-off this week.
Financial Advisers
JP Morgan, BofA Merrill Lynch and Perella Weinberg were the advisors to AT&T, while boutique media banking firm Allen & Co, Citi and Morgan Stanley advised Time Warner.
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