Antoine Gara , FORBES STAFF
The ink has barely dried on telecom giant AT&T’s over $80 billion cash and stock takeover of Time Warner, the owner of HBO, Warner Bros. and CNN, but the mega-deal is already creating waves in the media industry. AT&T’s acquisition puts struggling Twenty-First Century Fox further in the lurch, and it may strengthen the rationale for an eventual Disney and Netflix tie-up.
A takeover of Time Warner will instantly transform AT&T from a pipe in which media is consumed via satellite, cable, broadband and wireless service into one of the biggest content producers in the United States. While takeovers of this size are inherently risky for shareholders given the debt and equity financing needed to get a deal done, AT&T CEO Randall Stephenson views the maneuver as insulating the company’s nationwide transmission businesses from commoditization, while also allowing it to adapt to quickly shifting consumer habits.
“With great content, you can build truly differentiated video services, whether it’s traditional TV, OTT or mobile,” he said on Saturday evening. “It’s an integrated approach and we believe it’s the model that wins over time.”
For Time Warner CEO Jeff Bewkes, a deal at $107.50 pricetag is a capstone to one of the great corporate restructurings in American history.
Under Bewkes’s watch, Time Warner spun off AOL, Time Warner Cable and Time Inc. and sold Warner Music. Two of Bewkes’ spinoffs, AOL and Time Warner Cable, were acquired at premium prices in the past 24-months, but he’s held firm on Time Warner’s crown jewel media assets, fending off a bargain basement 2014 takeover bid from Fox. “This is a great day for Time Warner and its shareholders,” Bewkes said.
A pricetag of over $100 a share was likely simply too good to pass up. ”[We] believe Bewkes will end up being remembered as the smartest CEO in sector – knowing when to sell and not overstaying his welcome to maximize value for shareholders,” said Rich Greenfield, an analyst at BTIG Research.
Why does the deal matter for the media sector? In some sense it was an inevitability that takes both one of the best available assets off the market, in addition to one of the weightiest potential buyers. After all, AT&T’s takeover of Time Warner is a bit of a catch-up effort. Comcast has seen a strong payoff from it crisis-era acquisition of NBCUniversal and a more recent deal for Dreamworks Animation. Verizon, meanwhile, is building its own web-focused media footprint under the eye of former AOL CEO Tim Armstrong.
Now AT&T has the crown jewel property that will give it a powerful market position. If the so-called cable bundle is broken, or cord cutting accelerates, AT&T CEO Stephenson will still have a hand to play. What does the deal mean for content giants like Disney, Fox, Viacom and CBS, and what does it mean for AT&T’s competitor pipes? BTIG’s Greenfield takes a crack in a Saturday evening note, titled: As Legacy Media Enters Secular Decline, Time Warner Exits Stage Left – Others Unlikely to Be So Lucky
Disney: Too large to be bought beyond a tech company such as Apple or Google. Not to mention, Disney has signaled it is thinking of investing in distribution beyond its 1/3 stake in MLB’s BAMTECH. If not Netflix, unclear what Disney is thinking about to fix its lack of distribution.
Fox: Given Murdoch family ownership control, Fox is not for sale. Fox wanted to buy Time Warner but failed, and now is in no position to make another run financially (EBITDA far lower than projected, stock price down sharply and value of ownership in BSkyB, which it could monetize to finance a deal, down significantly as well). Fox has cut their buyback and is looking to make strategic acquisitions, the question is what? Unlike Disney, they are not capable of a major acquisition like Netflix.
Comcast/NBC: Comcast has already bought more content this year via DreamWorks Animation and has talked to the value of kids content implying they want even more. We have to imagine Comcast will be even more focused on wireless as we head into 2017, if the AT&T Time Warner merger is approved – can Comcast really resist buying T-Mobile?
Viacom/CBS: Given Redstone family control, they are not for sale. We continue to expect a merger of these two companies to increase their scale. We suspect one of the reasons AT&T is moving so quickly is that CBS was hoping to go after Time Warner following its Viacom merger. We believe that like Fox and Disney, a combined Viacom/CBS will be looking for additional assets.
Discovery: While we are sure Discovery would like to be sold at a valuation such as ATT’s acquisition of Time Warner, it has no prize assets like HBO or Warner Bros and its cable networks do not have the sports rights, at least domestically, that help secure distribution. Hard to see how a distribution player benefits from acquiring Discovery.
AMC Networks: We believe the Dolans would love to sell AMC sooner than later. Walking Dead is still an incredibly valuable show that AMC produces and distributes, but without a wide array of must-have content, it is hard to see how acquiring AMC helps anyone in the distribution world – not big enough and not enough great content.
Scripps: While Scripps has not executed well in mobile, its content could be of value in a direct-to-consumer world. In addition, with low sub fees, it has the least to lose going direct-to-consumer as the bundle breaks. That being said, given its size, it is also hard to see how it really provides meaningful content strength to a distributor – particularly, as the barrier to entry to creating similar content in the mobile world is low.
MSG Networks: We continue to believe MSG Networks, covered by Brandon Ross (MSGN, Buy, $30 PT) was separated from MSG with the idea of an eventual sale. While it is small, it is exposed only to the important New York market and it could be a strategic tuck-in acquisition for a Fox or Comcast or a distributor with exposure to the NY market such as Charter or Altice.