Time Warner Would Pay AT&T $1.725B If It Backed Out of Deal

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Time Warner

A regulatory filing details breakup fees and other financial details behind the mega-deal.

Time Warner would have to pay AT&T a $1.725 billion breakup fee if it calls off their mega-deal — in the instance, for example, it finds a different buyer — according a regulatory filing on Monday.

Meanwhile, if regulators block the $85.4 billion cash-and-stock deal announced over the weekend, the telecom giant must pay the entertainment conglomerate a reverse break-up fee of $500 million, the filing shows. Wunderlich Securities analyst Matthew Harrigan called the $500 million fee "modest." Another Wall Street observer said the fact that this fee was fairly small was a sign that the companies are confident in getting regulatory approval for the transaction.

Several analysts said the fees added to their expectation that no counterbid for Time Warner would materialize.

"We see little risk to the $500 million breakup fee and for a third party to come in higher," said Macquarie Capital analyst Amy Yong. "AT&T has right of first refusal and Time Warner would have to pay a $1.7 billion penalty." RBC Capital Markets analyst Steven Cahall echoed: "Time Warner faces a $1.725 billion breakup fee — a counterbid would need to be at least $110 per share just to cover these added costs," compared with AT&T's $107.50 per share offer.

And Stifel, Nicolaus analyst Benjamin Mogil wrote in a report: "With Comcast already owning Universal/NBC, there are likely few other bidders, given the size of the proposed deal and that AT&T/DirecTV have always viewed Comcast as its truest competitor. Dish has the national footprint to rival some of the industrial benefits, but we do not see them as a buyer of content assets. Verizon, though not having the [pay TV] footprint of AT&T, continues to be more focused on short-form content tied to its mobile footprint. We do not see the internet companies as bidders."

One banker said that there are no hard-and-fast rules for breakup and reverse breakup fees, but in the latter case fees of around 3 percent are common. In the case of the AT&T-Time Warner deal, 3 percent would have amounted to $2.55 billion.

There were no breakup fees for Comcast's NBCUniversal deal or its abandoned attempt to buy Time Warner Cable.

NBCUniversal's deal for DreamWorks Animation included a $200 million reverse breakup fee that Comcast and its entertainment arm would have had to pay if regulators hadn't approved the acquisition of the studio.

Other deals have had huge breakup costs included. In its own attempted $39 billion purchase of T-Mobile USA, AT&T paid up in 2011 when the deal failed. AT&T at the time said it paid $4 billion.

In the pending $4.4 billion takeover of Starz by Lionsgate, the latter would have to pay Starz $150 million if Lionsgate shareholders don’t approve the transaction and $175 million if the buyer calls off the deal. Lionsgate would also have to pay $250 million if it can’t raise the necessary debt financing. On the other hand, Starz would have to pay Lionsgate a $150 million breakup fee if it reneged on the deal.

Monday's regulatory filing also further detailed some financial specifics of the planned transaction. Time Warner shares will be converted into the right to receive $53.75 in cash plus a number of shares of common stock, par value $1 per share, equal to an exchange ratio. That ratio depends on Time Warner's stock price, specifically the average of the volume weighted averages of the trading prices of Time Warner shares on each of the 15 consecutive trading days ending on, and including, the trading day that is three trading days prior to the date of the effective time of the merger.

The ratio shall be 1.300 if the average stock is an amount greater than $41.349 and shall be 1.437 if the average stock price is an amount less than $37.411. "If the average stock price is an amount greater than or equal to $37.411 but less than or equal to $41.349, then the exchange ratio shall be an amount equal to the quotient obtained by dividing (x) $53.75 by (y) the average stock price," the filing added.

The filing also mentioned that Time Warner has extended the employment contracts of CFO Howard Averill, general counsel Paul Cappuccio and executive vp, international and corporate strategy Olaf Olafsson through the end of 2019. Executive vp, corporate marketing and communications Gary Ginsberg also received an extended employment agreement.

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