AT&T and Time Warner announced on Saturday that they have entered into a definitive agreement under which AT&T will acquire Time Warner in a stock-and-cash transactionfor an amount that’s estimated to be more than $85 billion valued at $107.50 per share. The agreement has been approved unanimously by the boards of directors of both companies.
The deal forming a media empire that will see AT&T adding major media properties such as HBO, Warner Bros. studio, CNN, TBS, TNT, Cartoon Network, and the broadcast rights to the National Basketball Association (NBA), March Madness, Major League Baseball (MLB), and even digital properties like Hulu, Bleacher Report and Fandango. This appears to be complementary to AT&T’s DirecTV play, a company that was acquired in a $45.8 billion deal two years ago.
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The deal is a mixture of stock and cash and will
AT&T’s chief executive Randall Stephenson will be the new head of the combined company while Time Warner’s leader Jeff Bewkes will be leaving after an interim period, according to The Wall Street Journal.
“This is a perfect match of two companies with complementary strengths who can bring a fresh approach to how the media and communications industry works, ” AT&T Chairman and Chief Executive Officer Randall Stephenson said in the statement.
AT&T said it expects $1 billion in annual run rate cost synergies for the 3 years after the deal closes. The company warns that the deal is subject to review by the U.S. Department of Justice. WSJ reported Time Warner will have to pay a $1.7 billion break-up fee if another company can muster the finances to outbid AT&T, but AT&T will pay just $500 million if the deal gets blocked due to anti-trust regulations.
The New York Times says that the deal may not go off without a obstacle. VentureBeat reports that when Comcast bought NBCUniversal, consumer groups and analysts expressed displeasure saying that it would reduce competition in the space, among other complaints. This time could be even worse because it’s not just a television company buying another television company — it’s a telecommunications company buying a television company, with more at stake.
Summary Terms of Transaction
Time Warner shareholders will receive $107.50 per share under the terms of the merger, comprised of $53.75 per share in cash and $53.75 per share in AT&T stock. The stock portion will be subject to a collar such that Time Warner shareholders will receive 1.437 AT&T shares if AT&T’s average stock price is below $37.411 at closing and 1.3 AT&T shares if AT&T’s average stock price is above $41.349 at closing.
This purchase price implies a total equity value of $85.4 billion and a total transaction value of
$108.7 billion, including Time Warner’s net debt. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
The cash portion of the purchase price will be financed with new debt and cash on AT&T’s balance sheet. AT&T has an 18-month commitment for an unsecured bridge term facility for $40 billion.
Transaction Will Result in Significant Financial Benefits
AT&T expects the deal to be accretive in the first year after close on both an adjusted EPS and free cash flow per share basis.
AT&T expects $1 billion in annual run rate cost synergies within 3 years of the deal closing. The expected cost synergies are primarily driven by corporate and procurement expenditures. In addition, over time, AT&T expects to achieve incremental revenue opportunities that neither company could obtain on a standalone basis.
Given the structure of this transaction, which includes AT&T stock consideration as part of the deal, AT&T expects to continue to maintain a strong balance sheet following the transaction close and is committed to maintaining strong investment-grade credit metrics.
By the end of the first year after close, AT&T expects net debt to adjusted EBITDA to be in the 2.5x range.
Additionally, AT&T expects the deal to improve its dividend coverage and enhance its revenue and earnings growth profile.
Time Warner provides AT&T with significant diversification benefits:
- Diversified revenue mix — Time Warner will represent about 15% of the combined company’s revenues, offering diversification from content and from outside the United States, including Latin America, where Time Warner owns a majority stake in HBO Latin America, an OTT service available in 24 countries, and AT&T is the leading pay TV distributor.
- Lower capital intensity — Time Warner’s business requires little in capital expenditures, which helps balance the higher capital intensity of AT&T’s existing business.
- Regulation — Time Warner’s business is lightly regulated compared to much of AT&T’s existing operations.