AT&T (T) - Get Report and Time Warner (TWX) are planning to walk down the altar together in hopes the marriage will give them the firepower needed to compete in the rapidly converging telecommunications and media industries.
Following media reports of deal discussions between the two last week, the companies
that AT&T has agreed to purchase Time Warner for $85.4 billion in cash and stock.
AT&T was tradingdown 1.5% to $36.93 Monday late morning while Time Warner was down 2.2% to $87.55.
AT&T's bold move highlights the impact of convergence between the telecom and media sectors, underscoring the wireless carrier's vision of combining its distribution offerings across mobile channels with Time Warner's popular content.
AT&T is still fresh offcompleting its massive $49 billion purchase of DirecTV in 2015. For Time Warner, the proposed tie-up comes after the New York-based entertainment giant rebuffed overtures from Rupert Murdoch's Twenty-First Century Fox (FOXA) - Get Report back in 2014 and reportedly emerged as a target for Apple (AAPL) - Get Report earlier this year.
The proposed acquisition is sure to alter the telecom landscape, putting AT&T's wireless rival Verizon Communications (VZ) - Get Report , as well as other content players like CBS (CBS) - Get Report and Viacom (VIAB) - Get Report , into the spotlight.
To be sure, the blockbuster deal is far from done. If history is any guide, the merger is likely to receive heavy scrutiny from the federal government, as shown by the strict conditions imposed on Comcast's (CMCSA) - Get Report $30-billion acquisition of NBCUniversal in 2011.
Here's what Wall Street's saying about the pending tie-up.
Matthew Niknam, Deutsche Bank (AT&T, Buy, $45 PT)
"The timing is a surprise as we thought near-term priorities (DTV integration, OTT, spectrum, Mexico and de-leveraging) implied larger M&A was unlikely anytime soon. Nonetheless, T has prioritized/leveraged scale across distribution platforms, and now seeks to marry that with content, accelerating a shift towards convergence/vertical integration. However, we see significant risks to the deal, including (1) regulatory pushback, and (2) limited accretion as implied by our M&A model. We think the risks to T are limited if the deal does not clear regulatory hurdles, via a small break free ($500mn, or $0.05/T share post-tax).
Timothy Horan, Oppenheimer (AT&T, Outperform, $46 PT)
"We believe the merger aligns with AT&T's goal of growing OTT video, particularly over mobile, which will serve to reduce churn. We believe the transaction is somewhat defensive as the hyper-scale Internet companies are also looking to provide OTT video services. We believe controlling content allows AT&T to create a more differentiated service and better control costs. ... The transaction highlights the growing importance of OTT and mobile video, which will drive strong volume growth on networks/cloud across the board. These trends are positive for towers, data centers, fiber and [content delivery networks]."
Jennifer Fritzsche, Wells Fargo (AT&T, $47 to $49 PT)
"While we expect this to be a tough fight, we would note this is indeed a vertical acquisition -- not a horizontal deal. T is not taking out a competitor but rather we think of it as a vertical bolt-on. Our regulatory contacts tell us that the U.S. Dept of Justice (DOJ) has never stopped a vertical merger in the telecom/media space. Thus, this would be precedence-setting if this deal did not go through. That is not to say it will be without concessions."
Amy Yong, Macquarie Capital (AT&T, Outperform, $43 PT)
"The one-two punch of DirecTV-Time Warner puts AT&T in a unique position to disrupt the mobile video landscape. We believe their ability to address consumer demands and create catered bundles will be unmatched. The pending acquisition will force everyone to step up their game: Verizon may look to acquire other assets beyond AOL-Yahoo while Comcast/Charter could look to a wireless strategy more imminently. This could position T-Mobile, Sprint and Dish as attractive takeouts."
Tony Wible, Drexel Hamilton (Time Warner, Buy, $107 PT)
"TWX is a truly unique media asset based on its size, mix of networks, better position and independent ownership. T's bid has the potential to draw out other buyers that may see this as a last chance opportunity to build up a large media platform. However, the deal values TWX at a rich 11x 2018 Ebitda, which may limit interest from traditional buyers."
Benjamin Mogil, Stifel (Time Warner, Hold, $105 PT)
"Potential alternate bid? With Comcast already owning Universal/NBC, there are likely few other bidders, given the size of the proposed deal and that T/DTV 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 [Multichannel Video Programming Distributor] 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."
Daniel Salmon, BMO Capital Markets (Time Warner, Market Perform, $108 PT)
"With CBS and VIAB increasingly appearing like a done deal, we think SMID cap Media could be due for even more consolidation, even after DWA's acquisition and the LGF + STARZ tie-up. We don't expect DIS or FOXA to enter the TWX bidding, and while the deal may prompt some more urgency from their M&A strategies, we do not expect it to be the mega-deal variety."