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Why AT&T Wants to Buy Time Warner

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AT&T wants to acquire Time Warner

In late October 2016, AT&T (T) announced that the company will acquire Time Warner (TWX) in a stock and cash transaction at $107.50 per share, a 36.0% premium. Time Warner stock closed at $89.48 on Friday, October 21, 2016. The transaction is valued at an equity value of $85.4 billion and a total value of $108.7 billion.

AT&T expects the acquisition to be accretive on an adjusted EPS (earnings per share) and FCF (free cash flow) per share basis in the first year after the close of the acquisition.

Now let’s look at why AT&T wants to buy Time Warner.

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Rationale behind the deal

Earlier this year, AT&T-DirecTV entered into a deal with Time Warner’s HBO. According to the terms of the deal, HBO will be available on AT&T-DirecTV’s soon-to-be-launched OTT (over-the-top) service called DirecTV Now. AT&T’s U-verse and DirecTV will also carry Time Warner’s HBO and Cinemax on their pay-TV platforms.

In 4Q16, AT&T (T) plans to initiate three OTT services: DirecTV Now, DirecTV Preview, and DirecTV Mobile. The market that AT&T is targeting for its OTT services is expected to expand in the medium term.

With the acquisition of Time Warner, AT&T would get access to Time Warner’s premium content, which would help the company with its DirecTV Now service. AT&T’s Entertainment business is becoming increasingly important for the company as indicated in the company’s recent 3Q16 results. It had revenues of $12.7 billion in fiscal 3Q16 with video or ad sales making up 71.0% of the segment’s revenues.

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