AT&T-Time Warner talks heat up, deal possible by Monday

AT&T is in advanced talks to buy Time Warner, which owns HBO, CNN, TNT and the Warner Bros. studios.
AT&T is in advanced talks to buy Time Warner, which owns HBO, CNN, TNT and the Warner Bros. studios. AP

AT&T is pushing to clinch a blockbuster deal to buy Time Warner by Monday, aiming to close the door on other potential bidders, according to a person familiar with the matter.

Talks between the companies have accelerated since Bloomberg News first reported Thursday that executives had met in recent weeks to discuss potential business combinations, said the person, who asked not to be identified discussing private discussions. Part of AT&T’s concern is that other suitors such as Google or Apple could jump in, the person said.

Buying Time Warner would give AT&T — already a top U.S. supplier of pay-TV, mobile phone and home internet services — premium entertainment programming to offer its millions of subscribers, from HBO to the NBA to the Cartoon Network. CEO Randall Stephenson is transforming the Dallas-based phone company into a media and entertainment giant, and now has one of Hollywood’s top film and TV producers in his crosshairs.

“Once AT&T turned the corner into media with the DirecTV deal, they realized they have to move fast and seize the opportunities,” said Roger Entner, an analyst with Recon Analytics. “The market is changing rapidly, and AT&T wants to be the leader.”

Shares of Time Warner, the owner of CNN, HBO and the Warner Bros. studio, surged as much as 14 percent to $94.44 in New York before closing at $89.48. That gives the company a market value approaching $70 billion and pushes the stock beyond the $85-a-share that Rupert Murdoch’s 21st Century Fox unsuccessfully offered in 2014. AT&T, the largest U.S. pay-TV company through its ownership of DirecTV, fell as much as 4.4 percent and was trading at $37.38.

Possible suitors

Apple is unlikely to bid for Time Warner, according to a person with knowledge of the matter. Fox has no plans to revive its pursuit of TWX, with one of the main impediments being price, according to a person familiar with the matter. Google declined to comment, as did AT&T and Time Warner.

A deal for Time Warner would have to begin at a “bare minimum” of $100 a share, said Alan Gould, an analyst at Brean Capital, in a note Friday. His private market value for the company is $123.

“We have always believed that the combination of content and distribution makes sense,” Gould said in the note. Time Warner “has been the greatest content factory for films and TV. Given the rapidly evolving distribution universe, we believe content ownership could be beneficial.”

Willing seller

Time Warner CEO Jeff Bewkes is a willing seller if he gets an offer he thinks is fair, said one of the people. Up to now, AT&T has focused on media and entertainment targets, including companies worth $2 billion to $50 billion, people familiar with the plans said earlier this month. Time Warner, as one of the most valuable media companies, takes that to a new level.

“AT&T does deals. That’s been their legacy for the past 25 years,” said Jonathan Chaplin, an analyst with New Street Research. “The bigger the deal, the more it moves the needle and there aren’t many companies that fit AT&T’s criteria as well as Time Warner.”

While Time Warner would give AT&T prime assets like TNT and CNN, along with the Warner Bros. film and TV studio, those businesses are well outside the phone company’s usual strengths and don’t offer a lot of potential synergies. The company’s current media holdings include the Audience Network, which is part of DirecTV, and Otter Media, a joint venture with former Fox executive Peter Chernin that invests in online video businesses such as Fullscreen.

“They know they’ll have to listen to the people who run these businesses and learn from them,” Entner said.

Debt-equity financing

Any deal is likely to include debt and stock, according to Dave Novosel, a bond analyst at Gimme Credit. That means AT&T investors would be asked to swallow another big chunk of borrowings and a diluted equity stake, a little more than a year after the company acquired DirecTV in a debt-financed deal for $48.5 billion. AT&T, with the third-lowest investment-grade rating, could make a deal work without getting downgraded to junk — but it would be tough. The company would also have to weigh the implications for its dividend, $1.92 a share over the past year, which has a current yield of 5.1 percent.

AT&T has $120 billion in debt, while New York-based Time Warner had long-term obligations of more than $24 billion.

“Look, it would take 12 months to close the deal,” Novosel said. “That’s plenty of time to pre-fund it, raise money and put it in escrow. They are probably thinking, ‘With these interest rates, why wait?’”