AT&T pays $85.4bn for Time Warner amid strong demand for original content

Contact: Scott Denne

Original content plays a starring role in telecom’s future as AT&T shells out $85.4bn for Time Warner. Facing competitive pressures in its core wireless business – revenue was down year over year in that segment last quarter – AT&T plans to leverage Time Warner (owner of HBO, Warner Brothers Studios and Turner Networks, among other properties) to provide original content for the latest online content distribution properties, such as its forthcoming streaming service, DIRECTV Now.

The availability of commercial-free, on-demand content initially drew eyeballs to streaming services such as Netflix, Hulu and Amazon Prime. As troubling as that was for TV and Internet service providers to watch, it was just a remake of the distribution of content – a business where they’re comfortable. Increasingly, though, as surveys by 451 Research’s VoCUL show, original content is the draw. In our most recent survey in June, the number of Netflix subscribers that cited original content as an important factor in their subscription rose seven points from December to 34% – the same percentage of subscribers to Time Warner’s HBO streaming service also cited original content. (Only Showtime had a higher percentage, with 36%).

Differentiated content comes with a substantial price tag. AT&T will spend $85.4bn in cash and stock (split evenly) to acquire Time Warner. After bolting on Time Warner’s existing debt, the target has an enterprise value of $106bn, or 3.8x trailing revenue. That’s almost a turn higher than the valuation of Walt Disney, a company with growth in the high-single digits (compared with Time Warner’s slight declines this year). AT&T has taken out a $40bn bridge loan to fund the transaction, which it expects to close next year. When it does, AT&T expects to continue to operate the acquired business as a separate unit with the same management team.

For Time Warner, the deal provides a way out of a challenging time for high-end content producers. When quality content was pricey to create and distribute, Time Warner and a handful of others could claim a monopoly on consumer attention. That’s no longer the case. Coupled with that, trends in advertising are beginning to favor entities that can provide targeted audiences – something AT&T plans to pursue with this move. For now, advertisers still look toward networks to reach large-scale audiences. But Time Warner and others, which have no direct links to their audiences, are at risk of being disintermediated by content distributors and service providers. In that respect, it makes sense for Time Warner to make a hedge against this trend by linking up with AT&T. It also helps explain why Time Warner management had little interest in a slightly smaller bid from 21st Century Fox in 2014.

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