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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

AT&T Set to Acquire Time Warner as Judge Rules in Favor of $85 Billion Merger

The merger paves the way for further consolidation in the industry, which will catalyze competition in the entertainment streaming market

In a historic case, and against all odds, AT&T (NYSE:T) secured a landmark victory on Tuesday as a district court greenlighted its $85 billion acquisition of Time Warner Inc. (NYSE:TWX).

The government has failed to prove that the deal violates antitrust regulation, the district court Judge, Richard Leon, saidin his decision. The judge is also refusing to put the decision on hold in an event of a request from the Department of Justice for a stay, saying that it would be detrimental to the acquisition.

“We are pleased that, after conducting a full and fair trial on the merits, the Court has categorically rejected the government’s lawsuit to block our merger with Time Warner,” said AT&T General Counsel David McAtee in a statement after the victory.

AT&T plans to close the deal by June 20.

AT&T’s investors aren’t thrilled as the stock was down 2.2% while Time Warner jumped 4.5% in premarket trading Wednesday. Twenty-First Century Fox (NASDAQ:FOXA) – the media empire controlled by Rupert Murdoch – also rallied, up 7% in after-hours trading on Tuesday, as the AT&T win paves the way for Fox’s media assets to be sold to Disney (NYSE:DIS). A bid from Comcast (NASDAQ:CMCSA) is also expected soon. After declining 1% in afterhours on Tuesday, the online streaming giant Netflix (NASDAQ:NFLX) has erased yesterday’s losses in the pre-market today despite the fears of emerging competition from the changing dynamic of conventional media industry.

What’s the deal?

AT&T announced the deal to acquire Time Warner back in 2016, in order to branch out its revenue streams and expand the reach of its content to compete against the likes of Netflix and Amazon (NASDAQ:AMZN). Time Warner shareholders are set to receive $107.50 per share under the terms of the merger, including $53.75 per share in cash and $53.75 per share in AT&T stock, according to an AT&T press release.

The deal brings the content libraries of HBO, CNN and Warner Bros to the distribution network of AT&T, which includes Pay-TV, broadband and mobile distribution serving more than 100 million subscribers. The AT&T-Warner merger creates a $282 billion media giant and is sending ripple waves through the media industry.

Points of interest

  • To state the obvious, it’s going to get hot for content streaming services like Netflix.

The merger will allow AT&T to directly compete against Netflix and Amazon using the quality content of Time Warner and its own distribution network. HBO is second to none when it comes to content creation for television; Game of Thrones is one of the many examples of the content prowess of HBO. AT&T can now push for domination in the content streaming arena by making Time Warner’s content available through Direct TV Now, an on-demand online steaming service of the company. Moreover, the merger also makes way for HBO NOW – the on-demand streaming service of HBO – to compete against Netflix using AT&T’s extensive network. It seems like things are taking a turn for the worse for Netflix.

Nonetheless, AT&T has to up the ante in content spending to match Netflix. The online streaming giant is spending around $8 billion on content during 2018. AT&T certainly has the firepower to do so. The company generated $17.6 billion in free cash flow during 2017. In contrast, Netflix reported negative operating cash outflow of $1.8 billion during 2017; the entertainment streamer is financing its operations mostly with debt. This means that it will face difficulties in keeping up with the pace of content spend if AT&T chooses to go that way.

Although HBO had quality, it didn't have the volume to compete against Netflix. As a result of the merger, AT&T can now use HBO’s content and secure additional content given its deep pockets. The point is AT&T can certainly compete on the basis of original content, creating problems for the streaming giant.

  • The industry is set to witness consolidation amid AT&T-Warner merger.

The judgment in favor of AT&T sets precedence for vertical integration in the media industry in the backdrop of competition against internet companies like Netflix and Amazon. Disney has already agreed to acquire media assets of Twenty-First Century Fox. Given the green signal to the AT&T-Warner merger, Comcast will now most certainly place a bid for Fox’s prized assets. CNBC – a daughter company of Comcast – recently reported that Comcast will bid for Fox’s media assets in case the AT&T-Warner merger goes through. Disney is already preparing an all-cash offer if Comcast bids for Fox’s assets. It seems like there will be a showdown for the acquisition of Fox’s assets.

  • Fragmentation is in sight in the streaming market.

As the media industry consolidates, content will become exclusive. Disney already hinted last year that it will pull its content from Netflix. Moreover, as companies create their own streaming services, cross-platform content licensing is set to become obsolete. For instance, AT&T won’t share its content with any other providers in order to attract more subscribers for its own platform. Disney will also do the same as the company is planning to launch its own streaming service. To cut the chase, entertainment content will be fragmented across different streaming platforms. This means that no single company will be able to become an entertainment hub. Moreover, content providers will have to spend billions on content consistently in order to remain relevant in the steaming arena.

Bottom line

Thanks to the merger of AT&T and Time Warner, the on-demand video streaming industry – currently dominated by Netflix – is setting up for serious competition. These high profile mergers in the media industry are just a sneak peek of what will be a battle for streaming domination.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

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