Report: Time Warner in Advanced Talks With AT&T

Trading halted in Time Warner stock
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Related: Media Stocks Jump on Time Warner Merger News

AT&T is in advanced talks to acquire Time Warner, according to a report by the Wall Street Journal.

Time Warner stock jumped more than 8% to nearly $90 a share in late morning trading. Trading was later halted in Time Warner shares. AT&T stock was down nearly 3%.

There were reports Thursday that AT&T and Time Warner had held talks that were informal and touched on several areas in which they could do business together.

But Friday's report called the talks advanced and indicated that a deal could take place as soon as over the weekend.

AT&T, which acquired DirecTV last year for $48.5 billion, is now looking to acquire content to fill its pipelines, according to a story by Bloomberg.

Time Warner rejected an $85 a share offer from Rupert Murdoch's 21st Century Fox in 2014.

Credit Suisse analyst Omar Sheikh speculated that a bid for Time Warner would exceed $100 billion and perhaps be as high as $110 billion based on the growth of Time Warner's revenues and earnings since 2014.

"Assuming maximum gross leverage of 3.5x and $500 million to $1 billion of cost synergies, Time Wasrner shareholders would be offered only 45% cash for their shares, with the remainder in new AT&T shares," Sheikh said.

AT&T has grown its footprint in the TV and broadband distribution business and now is focusing on expanding into the media and entertainment parts of the business through acquisitions.

Time Warner's businesses include such cable channels as HBO, TNT, CNN and Cartoon Network and Warner Bros., which creates movies and television shows.

According to the report, neither company commented.

Credit Suisse's Sheikh on Thursday noted that "any potential combination of AT&T and Time Warner would very likely prompt an anti-trust review in the U.S."

Sheikh noted that both the FCC and the Department of Justice have had concerns about vertical integration of content owners and distribution platforms, such as the Comcast acquisition of NBCUniversal a few year ago.

The FCC and DOJ would have to vet the merger. If past is prologue, that would take most of a year and happen mostly under a new administration.

If so, and it is a Clinton Administration, it would likely get a long, hard look.

In an October 2015 interview with qz.com, Clinton said she would beef up antitrust enforcement at DOJ and the Federal Trade Commission. "I will direct more resources to hire aggressive regulators who will conduct in-depth industry research to better understand the link between market consolidation and stagnating incomes," she said.

The FCC and DOJ approved the AT&T/DirecTV deal, but that was primarily a horizontal merger, billed as a way to combine broadband and video distribution to make AT&T a stronger competitor to Comcast and other cable ISPs who bundle net and video services, rather than a vertical combination of distributor and content provider, as AT&T-Time Warner would be.

One veteran attorney pointed out that Justice would probably be the lead dog on the review since Time Warner is out of the cable business and does not have broadcast licenses, so there was not a lot of FCC purchase on the review.

In support of the deal, he pointed out that AT&T/Time Warner combo could make AT&T an even stronger competitor to Comcast, which would mean more competition in the video space. Though he agreed that a Clinton Administration vetting the deal was the a big X factor.

"At best, we believe a lengthy anti-trust review of AT&T-Time Warner with an uncertain outcome may give both sides pause on considering a combination. At worst, it may act as a barrier to a deal being proposed, in our view," Sheikh said.

But Sheikh noted that Time Warner could be the best partner for a company looking to buy into the content business.

"With no blocking/family shareholder, control over a leading film and TV studio, plus valuable sports and drama networks, Time Warner is the partner of choice if any consolidation is to take place in US Media in our view," he said. "While the speculation about interest from AT&T may prove to be short-lived, we argue that it highlights the strategic value of Time Warner's assets, which is likely to continue to provide support for the stock."

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