AT&T mulls reinvention through Time Warner deal

Bloomberg

Time Warner Inc. and AT&T Inc. have survived the evolution of color TV and cable over the decades. Now they’re merging to adapt to the latest technological shifts: smartphones and streaming.
More consumers are getting their entertainment online from Netflix Inc. and watching on iPhones instead of TVs. That’s putting pressure on traditional entertainment companies and pay-TV providers. For many, it’s no longer enough just to make TV shows or own a cable company. “You need to do both,” said Chris Marangi, co-chief investment officer at Gamco Investors Inc., which owns stock in both companies.
That logic is driving Dallas-based AT&T’s proposed acquisition of Time Warner as two storied companies respond to changes reshaping the entertainment industry in 2016. AT&T, founded in 1885, has agreed to buy the parent of the 93-year-old Warner Bros. film studio for $107.50 a share, or $85.4 billion, according to a statement on Saturday.
The transaction is valued at $108.7 billion including Time Warner’s net debt. Once the deal closes, Time Warner shareholders will own 14.4 percent to 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.
Pay-TV distributors like AT&T, the parent of DirecTV, are trying to prevent subscribers from dropping their services for cheaper online alternatives. They aim to own content they can offer wherever consumers want, whether it’s streamed to mobile phones or broadcast on TV.
AT&T’s chief rival, Verizon Communications Inc., has bulked up in a different way, opting for original programming designed specifically to be viewed on smartphones for its mobile video service, Go90. Verizon has been buying companies like AOL and Yahoo! Inc. to become a player in the mobile advertising market.
New York-based Time Warner, which also owns CNN and HBO, is a rich target for AT&T. The media company has a vast library of movies and television series, such as the “Harry Potter” films and “Game of Thrones,” and is among Hollywood’s most prolific producers. Its annual revenue totals $28 billion.
PRESSURE TO SELL
AT&T’s interest “demonstrates the embedded value of media content in distribution platforms,” said Steven Cahall, an analyst at RBC Capital Markets.
The same industry pressures may explain Time Warner’s willingness to sell — two years after rejecting a buyout offer from 21st Century Fox Inc.
Time Warner, Walt Disney Co. and competitors like Viacom Inc. are all confronting similar threats: falling TV ratings as consumers drop or pare their cable-TV subscriptions for online alternatives.