Rationale behind the acquisition

In the previous article, we discussed AT&T’s (T) announcement that it would acquire Time Warner (TWX). The financial benefits of the transaction are limited, but the strategic implications are clearer.

Saturation in the US wireless market has made it difficult for AT&T to grow and gain market share as it competes with more aggressive rivals. Like Verizon (VZ), AT&T is struggling to attract new customers in the face of heavy promotional activity from Sprint (S) and T-Mobile (TMUS).

What Does the Time Warner Acquisition Mean for AT&T?

As we can see in the chart above, during the last few quarters, there has been a negative trend in the number of postpaid phone subscribers for AT&T. In 3Q16, AT&T lost 268,000 postpaid phone subscribers. During the same period, Verizon lost 36,000 postpaid phone subscribers for the first time ever. However, postpaid phone net additions by Sprint and T-Mobile were 347,000 and 851,000, respectively.

With its acquisition of Time Warner, AT&T will gain access to Time Warner’s premium content, which could help it to distribute more content to its customers and third parties. AT&T has been frustrated with the negotiations involved in acquiring content from content providers. Following the company’s acquisition of Time Warner, this process will be seamless and less time consuming.

Financial benefits of the acquisition

AT&T expects the TWX acquisition to be accretive on an adjusted EPS (earnings per share) and free cash flow basis in the first year following its closing.

The company also expects that within three years of the close of the acquisition, cost synergies could be around $1 billion. AT&T also expects that the combined company will be able to explore new opportunities for generating revenue that would not have been possible for either company on a stand-alone basis.

Additionally, there will be cost savings from reductions in advertising. Currently, the companies spend a combined $6 billion on it. Cost savings will likely also come from AT&T’s combining Time Warner’s content with its direct-to-video infrastructure.

In the next article of this series, we’ll discuss the regulatory hurdles of the AT&T–Time Warner deal.

Latest articles

19 Jul

Afya's IPO Sees Strong Listing Gains

WRITTEN BY Mohit Oberoi, CFA

Afya (AFYA) listed on the Nasdaq Global Select Market on July 19. The company priced its IPO at $19 per share.

19 Jul

What to Watch For in Amazon's Q2 Earnings

WRITTEN BY Sanmit Amin

e-Commerce giant Amazon (AMZN) is scheduled to report its second-quarter earnings results after the closing bell on July 25.

19 Jul

Barrick Gold Reaches Deal to Buy Acacia Mining

WRITTEN BY Anuradha Garg

After a long standoff, Barrick Gold (GOLD) and Acacia Mining (ABGLF) have reached an agreement.

19 Jul

Comcast Shares Pop on Goldman's Optimism

WRITTEN BY Ruchi Gupta

Comcast (CMCSA) shares popped after Goldman Sachs issued a positive note on the company recently. Goldman upgraded its rating for Comcast to "buy" from "hold."

19 Jul

Why Analysts Are Bearish on Netflix Stock

WRITTEN BY Aditya Raghunath

Netflix stock fell over 10.0% on Thursday and is down 0.5% today as well.

On Thursday, pet retailer Chewy (CHWY) reported its first-quarter results after the market closed. The company reported its earnings for the first time.