AT&T Buys Time Warner
Although 2018 is a long way from finished, I doubt we’ll see another court decision as important as the ruling over AT&T Inc.’s (NYSE:T) acquisition of Time Warner Inc. (NYSE:TWX). It was the first in a long line of dominos to fall. And now comes the chain reaction.
Who wins? Who loses? What happens to our AT&T stock forecast?
Before we begin to unpack these questions, it’s important to divide AT&T and Time Warner into two separate categories. Yes, they are both mega-sized corporations, but one creates content and the other distributes it.
Time Warner owns HBO and Turner Broadcasting System, Inc., two behemoths in the world of premium content. AT&T runs Internet connections into your home. There’s a huge difference between the two.
So, in the most literal sense possible, AT&T is not a direct competitor to Time Warner. They operate at different stages of the media business, which means that AT&T’s true rival—its arch nemesis, in fact—is Verizon Communications Inc. (NYSE:VZ).
I bring this up not to be pedantic, but to illustrate that there are different kinds of mergers, and that the Department of Justice (DOJ) doesn’t typically block ones like this.
Some people have speculated that President Donald Trump’s vendetta against CNN is what motivated the lawsuit. Whatever the case may be, we now have a court ruling in favor of AT&T.
The judge ruled that AT&T buying Time Warner wouldn’t hurt consumers, but help them. (Source: “United States vs. AT&T Inc.,” United States District Court for the District of Columbia, June 12, 2018.)
What Does AT&T Get with the Time Warner Acquisition?
In buying Time Warner, AT&T is getting a media empire. The core assets, which collectively draw in roughly $31.0 billion in annual revenues, are comprised of:
- HBO: A premium cable channel—which means you pay extra for it—that is home to critically acclaimed shows such as Game of Thrones, True Detective, Westworld, The Sopranos, The Wire, and many more.
- Turner Broadcasting: Do you like watching NCAA basketball? What about the NBA Finals? Turner owns the rights to most of those games, including the popular halftime shows with Ernie Johnson, Shaquille O’Neal, Kenny Smith, and Charles Barkley.
- CNN: Whether or not you agree with CNN, there’s no denying it’s a powerhouse in the advertising space. During the first quarter, it was No. 1 among news networks for the coveted 18-to-34 demographic.
- Warner Bros: When it comes to television, the best thing you can have is licensing rights to a syndicated show. With that golden ticket, you can sell the same show to many different networks, doubling up on revenues simply because people are so desperate to rewatch the same episodes. Warner has multiple shows like this, including The Big Bang Theory, The Bachelor, and The Voice.
AT&T Time Warner Deal Details
The total cost of the AT&T Time Warner merger is approximately $85.4 billion. Below are additional details about the deal’s financial structure. (Source: “AT&T Completes Acquisition of Time Warner Inc.,” AT&T Newsroom, June 15, 2018.)
- TWX shareholders received 1.437 units of AT&T stock per share
- TWX shareholders received a cash payment of $53.75 per share
- AT&T issued 1,185 million shares of common stock and paid $42.5 billion in cash
- AT&T now has a total of $180.4 billion in net debt
Should the deal work as planned, AT&T will be saving $1.5 billion every year (starting three years from now). It could also make an extra $1.0 billion per year.
However, this would require a surgical precision on the part of management, because making hit TV shows is anything but a science. I worry that too much cost-cutting might ruin HBO or Turner, thereby resulting in accidental damage to the AT&T stock price.
What Does the AT&T Time Warner Deal Mean?
For Time Warner shareholders, it means a pile of free money. They’ve been waiting on this deal for 18 months, far longer than was necessary. But it’s a done deal now and shareholders got a final boost to the TWX stock price as the deal was completed.
Chart courtesy of StockCharts.com
AT&T shares dipped on the ruling, however, because no one is sure whether a telecom giant can make exciting content.
It’s extremely hard to foster creativity. Time Warner CEO Jeff Bewkes managed it by staying hands-off. He gave his staff a wide berth to be creative, but since he’s taking a $434.0-million “platinum parachute” out of the company, no one knows what comes next.
Side Note: Bewkes’s exit package is the largest in history. (Source: “Opinion: Here’s the biggest winner in the AT&T-Time Warner merger,” MarketWatch, June 14, 2018.)
Taking Bewkes’s place at the helm of AT&T subsidiaries is John Stankey, a veteran AT&T executive with little to no experience in media.
He is meeting with the heads of HBO, Warner Bros, and Turner in the next few weeks. Depending on how those meetings go, we might get a sense about Stankey’s managerial style and what it means for AT&T’s new creative class.
Either way, the net result is that AT&T has juicy assets it can squeeze for profits. Once those efforts make their way into the quarterly results, I’m confident the market will turn bullish on AT&T stock.
Possible Future Deals in the Industry
At the start of this report, I said more dominos will fall as a result of this deal. What I meant is that its rivals will have to undertake their own mergers in order to compete with AT&T and Verizon.
This proved true almost instantly.
Right after the merger was approved, Comcast Corporation (NASDAQ:CMCSA) put in a $65.0-billion offer to buy Twenty-First Century Fox, Inc. (NASDAQ:FOX). But here’s the crazy part—Comcast is offering to pay everything in cash!
Fox hasn’t accepted the deal yet, and even if it had, regulators would still have to give their blessing. The good news is that no one thinks the DOJ can effectively challenge it on antitrust grounds, not after they failed to stop the AT&T Time Warner merger.
Most likely, the deal will continue unabated. The only obstacle I can see is Walt Disney Co (NYSE:DIS), which had an agreement to buy Fox for $52.4 billion in stock. Comcast outbid them by 19%, but there are rumors that Disney’s coming back with an updated offer.
At the end of this bidding war, we’re going to have a handful of supergiants—Verizon, AT&T, and (probably) Comcast—in the media space. I think investors are underrating the benefit of holding these stocks over the long term.
Sure, the acquisition targets are great to hold right now. If you had TWX stock in your portfolio, you made a nice chunk of change from the AT&T merger. And if you own FOX stock, you are set up well for the next few months.
But if we’re talking about a five-year horizon, where you just want to leave some money in a stock and watch it grow, you could do a lot worse than AT&T stock.
I understand the company’s long-term debt is frightening. I get the fears about content degradation and managers who know nothing about entertainment. But at the end of the day, AT&T has pretty much become too big to fail. It is a giant that’s here to stay.