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The rise of millennial cord-cutters has now made its most definitive mark on corporate America: The $85 billion marriage of telecom giant AT&T and media juggernaut Time Warner. And reverberations of the deal unveiled Saturday will resonate the most in corner offices across Hollywood’s biggest television and film lots.
The company established by inventor Alexander Graham Bell in 1879 that survived radical changes in the telephone industry has just come rushing into the modern media age. AT&T’s acquisition will provide a massive amount of content to beam to its wireless, broadband and satellite TV customers. Buying Time Warner — itself dating back to when Albert, Sam, Harry and Jack Warner incorporated their fledgling movie studio in 1923 — gives AT&T access to programming from HBO, Warner Bros., and networks CNN, TBS and TNT.
The combination puts all of Hollywood on notice about how to navigate a quickly shifting media landscape — deal or no deal? Only cable giant Comcast, which in 2011 acquired NBC and Universal Pictures, harnesses the same kind of firepower in delivering content directly to viewers. But it throws into question how everyone from Rupert Murdoch’s 21st Century Fox to cable baron John Malone’s control of Lionsgate/Starz might respond.
“It’s the revolution of both of our businesses,” Time Warner chief executive Jeff Bewkes told reporters after the deal was announced. “Whether it’s the movies, television series or an original show, we want our audiences to access them wherever they are, whenever they want, too. We think AT&T gives us tremendous access to do that.”
The boards of AT&T and Time Warner were in talks for months before reaching a final agreement this weekend, including a meeting between the two top executives about a year ago where Stephenson said they discussed “the fair amount of convergence” between both companies that could “help evolve the ecosystem faster.” Those talks led to an acquisition considered to be one of the year’s most lucrative, handing Time Warner shareholders $107.50 a share in a cash-and-stock transaction that represents a more than 40 percent premium to where shares traded last week.
Full details of AT&T’s bid will be divulged when both companies file documents with the Securities and Exchange Commission on Monday, thus setting off a regulatory approval process that could stretch for a year. Details filed with the SEC also will include any break-up fee should the deal fall apart, which could occur if any rival media companies mount an alternative bid.
Putting the deal in perspective for the entertainment industry, the acquisition could bring massive benefits to AT&T’s 45.5 million DirecTV and U-verse viewers, along with 142 million wireless subscribers. It would give AT&T rights to hits like Game of Thrones, Westworld and True Detective, along with Warner Bros. film legacies such as Batman and Harry Potter. AT&T can also tap into HBO’s 130 million cable and online streaming subscribers.
“Premium content always wins. It has been true on the big screen, the TV screen and now it’s proving true on the mobile screen,” said AT&T chief executive Randall Stephenson after the deal was announced. “We’ll have the world’s best premium content with the networks to deliver it to every screen.”
Indeed, the deal marks a pivotal moment for Bewkes since he took stewardship of Time Warner in 2007. He pledged to shareholders two years ago that the company was worth remaining independent in the face of an $80 billion near-hostile takeover attempt by Murdoch, holding steadfast to the belief a more lucrative deal could be had.
Analysts say Bewkes, long considered a managerial placeholder until he could find just the right suitor, has been cautious about striking just any deal. On one side, the exec has been hampered by the disastrous combination with AOL more than 16 years ago that has continued to spook Wall Street. Yet, on the other side, he’s watched idly as rival Disney picked off top Hollywood brands like Marvel, Luscasfilm and Pixar.
Shareholders have given Bewkes extraordinary leeway, especially considering earnings are up 15 percent this year. The company also has pacified Wall Street by returning $29 billion to investors in the form of stock buybacks and dividends since he took office. So, analysts contend AT&T’s bid comes at the right time.
The transaction has also thrown Bewkes‘ standing with the new company into question. The executive told reporters that he plans to stay with the company through its integration with AT&T, and Stephenson pledged that would be “open-ended.” The AT&T chief also said he “expects all of our creative execs to go on for many years,” but did not comment specifically about the future of Warner Bros. head Kevin Tsujihara or others. Stephenson also denied reports that former Fox executive Peter Chernin, who has multiple business dealings with AT&T, might be brought in at a top level to manage the Time Warner properties: “I think he’s pretty busy with what he’s doing, so I have no idea what his plans are. I speak to him a lot.”
Stephenson did not respond to a direct question if he’d been in discussions with Chernin about a potential role in the new company.
Wall Street analysts were bullish about the combination at first blush.
“The AT&T, Time Warner deal will succeed,” said Southbay Research’s Andrew Zatlin, who runs the website Moneyball Economics. “The other mergers were ideas — a ‘field of dreams’ vision where somehow, someway, the companies would discover synergies.”
He believes the combination already is “vertically integrated in all but name.”
AT&T and Time Warner have some time on their hands to sort out the integration as federal regulators weigh approval. But the biggest headwinds during that time might come from rapidly deteriorating conditions for both cable companies and the programmers that depend on them.
Traditional audiences are dropping off: Some 1.4 million U.S. customers canceled paid television subscriptions in the past year, according to research house SNL Kagan. TBS and TNT, two of Time Warner’s flagship networks, have five million fewer viewers today than they did five years ago, according to Nielsen data.
A bulk of the losses are viewers cutting their cable and satellite bills by switching to streaming services like Netflix, Hulu, Amazon and others to view content. Profits are eroding at entertainment companies that rely on subscription-based television customers to power earnings, such as Disney’s dependence on sports giant ESPN.
“With the AT&T bid for Time Warner, the story becomes all about the broader implications,” said Sean Stannard-Stockton, chief investment officer of Ensemble Capital. “We think Time Warner’s willingness to sell at this price suggests that the management team has lost confidence in their ability to navigate the changes being wrought by streaming technologies. Yet, the deal also supports the idea that the market is materially undervaluing content companies.”
This is one of the reasons why dealmaking talk has been whipped into a frenzy lately.
Netflix shares have surged 50 percent since their summer low amid speculation that Disney, Facebook or others might strike a deal. Not hurting the surge was the streamer announcing strong quarterly subscription growth earlier this month. Viacom shares have rebounded amid moves by Shari Redstone to recombine it with CBS, of which her family’s trust is the biggest shareholder of each. Even Twitter’s stock has had a roller-coaster ride in recent weeks with Disney, Viacom and others bandied about as a possible acquirer.
No major deals have been announced, and analysts believe the AT&T-Time Warner linkup might accelerate any existing matchmaking talks. Names like Fox (where insiders tell The Hollywood Reporter the studio isn’t interested in entering a bidding war for Time Warner) could be drawn in from the sidelines.
Ted Sarandos, Netflix’s high-profile chief content officer, thinks media industry pundits should slow down. He believes it might be premature to suggest the government will give huge transformative deals the green light.
AT&T’s acquisition of Time Warner would be historic because it would roll together a massive number of the world’s blue-chip media brands, transforming the nation’s second-largest wireless carrier into an entertainment colossus. It also comes a year after Comcast walked away from its $45 billion acquisition of rival Time Warner Cable amid concerns the government wouldn’t approve the deal.
“It’s a tough hypothetical,” Sarandos said Saturday while giving a keynote address at USC’s annual institute on entertainment law and business. “I’m sure it’s going to have a lot of DOJ [Department of Justice] scrutiny. How it impacts anybody will depend on how it emerges, if it emerges.”
Approval of an AT&T-Time Warner combination even caught the attention of Donald Trump on the campaign trail.
The real estate mogul, often caught at odds with Time Warner-owned CNN during the campaign, vowed to reject the deal if he takes the White House. “As an example of the power structure I’m fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it’s too much concentration of power in the hands of too few,” Trump said during a stop in Gettysburg, Pa.
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