By: Qian Wang
Perhaps one of the most controversial and topical acquisitions that happened recently is the $85 billion acquisition deal reached between AT&T and Time Warner. As many people are familiar with AT&T, a leading multinational telecommunication conglomerate with market capitalization of $233 billion is going to acquire another media industry leader, Time Warner with a $68 billion market capitalization. Acquisition between these two titans will transform the media and telecom industries and reshape the business models on delivering video content. Over reading many of the articles on this acquisition, there are major two takeaways from this topic that are discussed most of the time. It is still a bit early to call for the deal given that a challenge most likely will happen. The magnitude of the acquisition will definitely be scrutinized under Department of Justice’s antitrust division.
Before anything becomes realistic, the deal has to pass its first challenge and perhaps the most critical block to complete the acquisition, regulatory scrutiny. Given the combined power after the acquisition, it arouses the idea of monopoly and eyes from various different legal aspects. Regulators are analyzing whether the acquisition will benefit the consumer and improve a healthy competition. Especially, they are looking for any anti-competitive behavior. The biggest concern now is the increased power that combined company would have on content distribution. On the negative side, AT&T would distribute Time Warner’s content exclusively on AT&T’s network, so it will eliminate consumer choice and destroy competition that already licenses such content. Yet, obviously, price for consumer will not go down after this transaction. Historically, regulators have been reluctant to approve cable companies’ mergers, because it might create national fear that it would put too much power into hands of distributors. Conversely, AT&T and Time Warner acquisition could increase competition across competitive streaming landscape. Integrating Time Warner, plus earlier acquisition with Direct TV into streaming bundle would allow AT&T directly to compete with online streaming content providers, such as Hulu, Netflix, and Amazon Video. Overall, it increases the competitive offerings of streaming bundles and forces others to enhance their services to keep their competitiveness.
Second takeaway is the economic sense of the acquisition. Many people know that it is a huge acquisition, but how is it beneficial for both companies that let them to make such move? The deal comes with stock purchased at $107.5 a share, which AT&T offers roughly 35% premium to where Time Warner stock was trading before the news emerged. How the price justifies the benefit that will accrue from the investment? The best metric to value the investment is through the ratio of Return On Invested Capital (ROIC). Through analysts estimates, assuming 5.7% revenue growth after 2017, the acquisition earns 5% ROIC, which is equals to AT&T’s current ROIC and its Weight of Average Cost of Capital (WACC). AT&T could pay $149 per share, which is 39% higher than proposed price for Time Warner. With ROIC equal to WACC, it implies the investment neither destroys nor creates shareholder value. One other scenario, 8.7% growth rate assumes the acquisition creates higher revenue through expanded platform. This will yield 6% ROIC, and slightly higher than AT&T’s current ROIC. With 8.7% growth rate and 6% ROIC, the implied price for Time Warner is $119 per share, which is still 11% higher than the proposed price. Yet, any deals that yield higher ROIC are attractive to shareholders. Besides the ROIC, AT&T will benefit from increased data usage across its network. Also the acquisition will improve AT&T service by bring high quality original content from cable channels such as CNN to a streaming bundle and creates a
differentiated steaming package. The companies said that they aim to be the first U.S wireless company to compete national wide with cable companies by providing online bundles.
The acquisition emphasizes one of the most noticeable trends in media and telecom industries. The traditional cable television and traditional mobile network inevitably are having a declining trend in profit growth. As more of content consumers are shift from watching cable television to online streaming, the sustainability of cable companies to maintain profit is a major concern. It is same to mobile network. data usage business for wireless service is nearly mature. The only way to expand its data usage is through providing more contents that consumers could stream from its wireless network.