With a surprise $85 billion bid for Time Warner, AT&T CEO Randall Stephenson is betting big on the future of mobile video. The marriage would pair Time Warner’s award-winning content, ranging from HBO’s “Game of Thrones” to Warner Bros. movies and CNN, with a national communications network run by the second largest U.S. wireless carrier. As more people move away from their TVs to watch content wirelessly on smartphones and tablets, AT&T believes it needs to be in the forefront of this trend. “The future of video is mobile, and the future of mobile is video,” Stephenson said in a corporate video announcing the acquisition.

AT&T Time Warner

AT&T – Time Warner Merger

But Wall Street is skeptical about the transaction. Shares of both companies fell on October 24, the first trading day after the deal was announced. And while AT&T has pledged to pay Time Warner shareholders $107.50 per share in cash and stock, Time Warner shares still hover below $90 — meaning that its stock is not as popular as would be expected in the face of a big payout.

There are many reasons why investors would be hesitant to bless this transaction. AT&T is paying what Moody’s Investors Service deemed as a “full” price for Time Warner — while it’s still fresh from the $49 billion purchase of DirecTV and its Latin American business to become the biggest pay TV provider in the world. The acquisition would balloon AT&T’s already hefty debt load to more than $170 billion, the credit ratings agency said.

Moody’s, which put AT&T’s senior unsecured rating on review for possible downgrade, also sees the move as a defensive strategy for the company amid stalling wireless growth and intense competition. As for Time Warner, the deal comes at a time of pressured ratings at cable networks as people migrate to Netflix and other “over-the-top” content services providers.

[drizzle]Moreover, regulatory approval could be tough with both the Republican presidential and Democratic vice president nominees opposing the transaction and congressional committees calling for hearings. While the deal is seen as similar to Comcast’s approved purchase of NBCUniversal, Comcast’s later bid for Time Warner Cable (spun off by Time Warner in 2009) was shot down even if their service areas don’t overlap. And even if the AT&T deal does pass, Moody’s says regulators will ban their ability use premium content as an advantage over competitors on antitrust grounds.

Stephenson and Time Warner CEO Jeff Bewkes, meanwhile, continue to point out the deal’s merits. In the corporate video, they said their companies will be well-positioned to provide content to mobile viewers. “The media and communications industries are converging. And when it comes down to it, premium content always wins. It’s been true on the big screen, the TV screen and now it’s proving to be true on the mobile screen,” Stephenson said. The deal “creates a unique company that will lead the next wave of innovation and how people enjoy video entertainment.” Bewkes added that AT&T “dramatically accelerates our ability to deliver … our leading brands and premium content to consumers across all platforms and devices.”

But how will they do it? “I’m skeptical there is real synergy here,” says Kevin Werbach, Wharton professor of legal studies and business ethics who has advised the Federal Communications Commission on broadband issues. “It’s hard to see what the big value proposition of AT&T and Time Warner is here if it’s not somehow to extract more out of this bundle and effectively lessen competition.” But that’s something regulators will seek to ban.

Why AT&T Wants Time Warner

So why make the move now? “AT&T feels like it has to do something because its fundamental business of connectivity for broadband and wireless is going to be challenged over the long haul,” Werbach says. Indeed, Verizon is pursuing a similar strategy with its own content acquisitions — AOL and Yahoo — as it faces similar competitive pressures from Sprint and T-Mobile as well as cable and satellite TV operators and online TV services.

“It’s hard to see what the big value proposition of AT&T and Time Warner is here if it’s not somehow to extract more out of this bundle and effectively lessen competition.”–Kevin Werbach

“The companies are in a similar position. They have a wireline telephone business that’s going away. They have a wireline broadband business that’s losing out to cable even with a higher-speed fiber-based offering. They have a wireless business that is peaking in terms of the potential for subscribers and revenue growth,” Werbach says. Moreover, cable companies’ ventures into mobile phones that hop between Wi-Fi and cellular could be “very devastating to their economics.”

AT&T’s third-quarter results already show declining trends in its core business: The number of net new U.S. wireless subscribers fell by 39%; subscribers of U-verse, AT&T’s pay TV service, declined by 23% and broadband also lost customers. Its DSL and landline phone services continue to lose subscribers in spades.

But while the telecom side was languishing, AT&T’s DirecTV unit did well, with satellite subscribers up by 6%. AT&T’s Mexican unit also was a highlight, with wireless subscriber rolls up 32%. With assist from DirecTV and Mexico, AT&T’s posted a 4.6% revenue gain to $40.9 billion in the quarter, with net income up 11.2%.

Adding Time Warner would further strengthen AT&T’s overall business. Indeed, both companies said the deal would add to AT&T’s adjusted earnings the first year after it closes, projected to be the end of 2017. It should also give AT&T more financial power to become better able pay out its historically high dividends.

The deal would improve revenue and earnings, diversify revenue sources at AT&T and lower capital intensity since the additional revenue brought in by Time Warner ($29 billion projected for 2016) would not require much in additional capital spending. Analysts are forecasting that AT&T, which has 133 million wireless subscribers, would post $164 billion in 2016 revenue.

But buying a company to shore up a business under fire is not a convincing growth strategy. Instead, AT&T has to come up with a “compelling story about why the combined company will deliver better products and services — and that means why it’s beneficial for consumers,” Werbach says. The deal’s rationale has to be “more than financial engineering. You’re in a big media market with a lot of big, sophisticated players. If you’re going to spend two years integrating, you better have a good story.”

It’s Not AOL Time Warner Redux

Thus far, this is the story AT&T and Time Warner are telling: They plan to develop innovative TV bundles that stream to mobile devices and experiment with various models to see which ones consumers will like. AT&T could not do this easily before because it didn’t own prime TV and movie content — and programming contracts with Hollywood were often restrictive.

“There’s always going to be synergies when you have two companies coming together, but [in this case] they’re pretty modest.”–Peter Fader

The pair also expect to ramp up advertising efforts such as offering addressable ads where different households are served differing ads based on relevance even as they watch the same content. Also, the companies can combine data culled from wireless and content sources to inform

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