Another blockbuster deal in the media landscape means another battle with regulators after AT&T this weekend agreed to acquire Time Warner for $85.4 billion.
The deal also will be a tough one to swallow for Wall Street as concern about AT&T’s latest attempt at vertical integration also will put AT&T into a massive hole financially, as the cost of Time Warner – including debt – puts the price tag up to $108.7 billion, on top of the estimated $119 billion AT&T already owes. If the deal is approved, AT&T’s debt will total nearly $170 billion, according to the Wall Street Journal.
AT&T last year acquired DirecTV for $49 billion, in 2015 spent $18 billion on wireless spectrum and is poised to spend more on spectrum this year.
But Time Warner’s revenues could help assuage concerns, as it brought in more than $28.1 billion in 2015 and would significantly change AT&T’s revenue mix, taking its entertainment business to roughly 40% of its total revenues.
Building an integrated media giant
The deal is a major build of last year’s DirecTV purchase and pushes AT&T closer to Comcast’s model as an integrated media giant.
“AT&T will own the distribution pipes and the content to deliver to subscribers across the US mobile, fixed line and satellite,” said IHS analyst Seth Wallis-Jones. “In comparison, Verizon’s nascent deal to acquire Yahoo and build on its acquisition of AOL looks like an increasingly half-baked attempt to leverage the potential nexus between network, content and advertising.”
Content has become an increasingly expensive ingredient for pay-TV operators and, as AT&T gets set to launch its high-stakes virtual MVPD play, DirecTV Now, later this year, gaining even partial control over content costs will be a major factor in its financial success, assuming it gains traction with its target audience, Millennial cord nevers and cross-generational cord cutters.
That’s something the telco is banking on, even acknowledging that it expects to see further erosion of its legacy pay-TV services, similar to the land-line phone losses it has experienced as its wireless phone business became dominant.
“Deals for exclusive access to content have been leveraged to build audiences for digital ‘Over The Top’ services,” said Wallis-Jones. “While sport has proved to be a major area of competition for the networks as they enter the content arena, properties such as HBO’s Game of Thrones hold a similar ‘must have’ attraction for audiences.”
Regulatory hurdles will be high
Both Republican and Democratic presidential candidates have said they believe the deal should be scrutinized, with Donald Trump saying he would block the deal and Hillary Clinton saying the deal would need to be reviewed closely.
Most critics argued that the deal could lead to higher prices and fewer choices for consumers, a reduction in competition and that it concentrated too much media power in one company, all concerns that led to a 13-month review – and eventual approval – of Comcast’s 2011 acquisition of NBCUniversal.
AT&T, like Comcast in 2011, said it would run Time Warner as a separate company that operated autonomously.
For its part, AT&T is expecting a tough review.
“Avoiding any kind of regulatory review is always a benefit,” said CEO Randall Stephenson. “But we aren’t naive. We aren’t thinking that that won’t happen.”
“The need to be competitive in this area is becoming paramount, with the likes of Hulu and YouTube preparing linear-channel-based online subscription offerings of their own,” said Ted Hall, director of research, IHS Technology. “In the context of the wider pay-TV business, future growth in the saturated and declining traditional TV market is likely to come from online services – AT&T has shown that it is not immune to the cord-cutting that has eaten into the cable sector, losing a combined 132,000 subscribers across its DirecTV (satellite) and U-verse (IPTV) platforms in the 12 month to end-Q3 2016.”