AT&T steals the scene with its $85.4 billion acquisition of TV giant Time Warner
The mega-deal, announced on Saturday Oct 22nd, would bring together the world’s largest telecommunications company ($146.8 billion in consolidated revenues in 2015) and one of the world’s leading media groups.
Both firms have a long history of transformation, studded with mergers, re-brandings and spinoffs: AT&T (originally American Telephone &Telegraph company) goes back all the way to Alexander Graham Bell. US regulators have already intervened twice to break up the company, which over time encompassed businesses as computer, wireless, landline and cable. The last wave of consolidation – started in 2014 with the failed acquisition of T-Mobile and the one (successful) of DirecTV – is just another sequel. Time Warner’s history is no less exciting: its 2000 acquisition by AOL made headlines twice: a first time as the biggest M&A deal to date, a second as a dramatic failure. The group has since generated many spinoffs: AOL went back to being a standalone company in 2009, before being acquired by telecommunications behemoth Verizon, whereas Time Warner Cable is currently owned by Charter Communications.
Today’s AT&T focuses on delivery: it is the second largest wireless provider in the US (133 million subscribers, just shy of Verizon’s 142), first landline carrier in America and the largest provider of pay TV worldwide. Time Warner itself has a lot to offer: it’s most valuable assets are cable channels like CNN, TNT, Cartoon Network and HBO (producer of viewers’ favourites Game of Thrones, True Detective and Westworld) and eminent movie producer Warner Bros.
AT&T has a market capitalization of approx. $225 billion, with its shares trading at $39 just before the announcement, or 17.4 times earnings. Its counterpart has a market cap of $68 billion and was trading just below $80 as of last week. With that said, the bid price – $107.5 per share – leaves room for a hefty premium of about 35%, implying an equity value of $85.4 billion and a total transaction value of $108.7 billion. Payment will be equally split between cash and equity. Just two years ago Time Warner had turned down an offer from 20th Century Fox, valuing the company at $85 a share; it had also reportedly attracted interest from Apple.
From a purely financial point of view, the deal does seem attractive: it is accretive in year one, and aims to improve dividend coverage as well as growth expectations, with $1 billion in estimated annual cost synergies within year three from close. It is not clear what the effect on AT&T’s credit rating will be, with the company announcing it should be positive, while Moody’s and S&P warn of the contrary. The two rating agencies currently rate AT&T Baa1 and BBB+ respectively, but may be getting ready for downgrade, following a potential rise in adj. debt to EBITDA from 3.1 to 3.7 and low investor appetite for additional debt.
Negotiations happened away from the public eye, with JP Morgan, Bank of America Merrill Lynch and Perella Weinberg advising AT&T and Morgan Stanley, Citi and Allen & Co. working for the sell side. Advisors reportedly stand to pocket $300-400 million in fees, also accounting for a $40 billion bridge loan to AT&T.
The deal’s rationale is still open for interpretation, with the two companies stressing the concept of vertical integration, while steering away from the idea – dreaded by most – of bringing concentration to the media market. In a time when video is streamed on multiple platforms and costumers are growing weary of pricy subscriptions, the deal would allow Time Warner to bring its original contents to a broader audience – focusing especially on mobile – while AT&T could bank on excess demand by generating additional advertisement revenue, which is destined to support – and eventually supplant – the one from subscriptions. This revenue synergy could be undermined by conditions imposed by regulators, such as the potential obligation to licence content to competitors. In terms of competition, the deal is likely to bring more in the cable TV and advertising business – currently dominated by Google and Facebook, while it may hurt costumers if Time Warner’s contents were to become predominant on AT&T’s platforms (primarily DirecTV), consequently reducing costumer choice.
The new deal has been largely compared to Comcast’s 2009 acquisition of NBCUniversal. Comcast – then the main player in the US cable market – had only managed to get away with it by agreeing to several conditions imposed by the US Department of Justice on antitrust concerns.
But AT&T seems likely to face an even more difficult battle with regulators than its competitor did a few years back. Timing, for instance, is awful: concentration in high-visibility markets does not sit well with the general public, and announcing the biggest merger of the year within two weeks of the US presidential election is certainly a bold move. Donald Trump, always very vocal in criticizing the media, has already announced he would stop the merger if he were to become president; but Mrs Clinton’s running mate Tim Kaine and primaries rival Bernie Sanders have also expressed concern. Public scrutiny will certainly play a role in the antitrust evaluation of the deal, which is set to last at least one year. The story is far from over and is sure to be filled with drama.
Federico Gagliardelli
The mega-deal, announced on Saturday Oct 22nd, would bring together the world’s largest telecommunications company ($146.8 billion in consolidated revenues in 2015) and one of the world’s leading media groups.
Both firms have a long history of transformation, studded with mergers, re-brandings and spinoffs: AT&T (originally American Telephone &Telegraph company) goes back all the way to Alexander Graham Bell. US regulators have already intervened twice to break up the company, which over time encompassed businesses as computer, wireless, landline and cable. The last wave of consolidation – started in 2014 with the failed acquisition of T-Mobile and the one (successful) of DirecTV – is just another sequel. Time Warner’s history is no less exciting: its 2000 acquisition by AOL made headlines twice: a first time as the biggest M&A deal to date, a second as a dramatic failure. The group has since generated many spinoffs: AOL went back to being a standalone company in 2009, before being acquired by telecommunications behemoth Verizon, whereas Time Warner Cable is currently owned by Charter Communications.
Today’s AT&T focuses on delivery: it is the second largest wireless provider in the US (133 million subscribers, just shy of Verizon’s 142), first landline carrier in America and the largest provider of pay TV worldwide. Time Warner itself has a lot to offer: it’s most valuable assets are cable channels like CNN, TNT, Cartoon Network and HBO (producer of viewers’ favourites Game of Thrones, True Detective and Westworld) and eminent movie producer Warner Bros.
AT&T has a market capitalization of approx. $225 billion, with its shares trading at $39 just before the announcement, or 17.4 times earnings. Its counterpart has a market cap of $68 billion and was trading just below $80 as of last week. With that said, the bid price – $107.5 per share – leaves room for a hefty premium of about 35%, implying an equity value of $85.4 billion and a total transaction value of $108.7 billion. Payment will be equally split between cash and equity. Just two years ago Time Warner had turned down an offer from 20th Century Fox, valuing the company at $85 a share; it had also reportedly attracted interest from Apple.
From a purely financial point of view, the deal does seem attractive: it is accretive in year one, and aims to improve dividend coverage as well as growth expectations, with $1 billion in estimated annual cost synergies within year three from close. It is not clear what the effect on AT&T’s credit rating will be, with the company announcing it should be positive, while Moody’s and S&P warn of the contrary. The two rating agencies currently rate AT&T Baa1 and BBB+ respectively, but may be getting ready for downgrade, following a potential rise in adj. debt to EBITDA from 3.1 to 3.7 and low investor appetite for additional debt.
Negotiations happened away from the public eye, with JP Morgan, Bank of America Merrill Lynch and Perella Weinberg advising AT&T and Morgan Stanley, Citi and Allen & Co. working for the sell side. Advisors reportedly stand to pocket $300-400 million in fees, also accounting for a $40 billion bridge loan to AT&T.
The deal’s rationale is still open for interpretation, with the two companies stressing the concept of vertical integration, while steering away from the idea – dreaded by most – of bringing concentration to the media market. In a time when video is streamed on multiple platforms and costumers are growing weary of pricy subscriptions, the deal would allow Time Warner to bring its original contents to a broader audience – focusing especially on mobile – while AT&T could bank on excess demand by generating additional advertisement revenue, which is destined to support – and eventually supplant – the one from subscriptions. This revenue synergy could be undermined by conditions imposed by regulators, such as the potential obligation to licence content to competitors. In terms of competition, the deal is likely to bring more in the cable TV and advertising business – currently dominated by Google and Facebook, while it may hurt costumers if Time Warner’s contents were to become predominant on AT&T’s platforms (primarily DirecTV), consequently reducing costumer choice.
The new deal has been largely compared to Comcast’s 2009 acquisition of NBCUniversal. Comcast – then the main player in the US cable market – had only managed to get away with it by agreeing to several conditions imposed by the US Department of Justice on antitrust concerns.
But AT&T seems likely to face an even more difficult battle with regulators than its competitor did a few years back. Timing, for instance, is awful: concentration in high-visibility markets does not sit well with the general public, and announcing the biggest merger of the year within two weeks of the US presidential election is certainly a bold move. Donald Trump, always very vocal in criticizing the media, has already announced he would stop the merger if he were to become president; but Mrs Clinton’s running mate Tim Kaine and primaries rival Bernie Sanders have also expressed concern. Public scrutiny will certainly play a role in the antitrust evaluation of the deal, which is set to last at least one year. The story is far from over and is sure to be filled with drama.
Federico Gagliardelli