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AT&T Takes a Vertical Leap

AT&T and Time Warner Inc. were deep in talks at press time concerning a possible merger that would combine the largest pay TV distributor in the country with the second-largest content company in a deal that could be worth more than $100 billion.

The Wall Street Journal reported briefly early Friday that talks between the two companies were in advanced stages and a deal could be announced soon, possibly over the weekend of Oct. 22. No other details were available.

The news of an impending marriage comes a day after Bloomberg reported that the two companies had conducted preliminary talks, mainly about ways they could work together, and mentioned the possibility of a merger. Apparently, those discussions heated up considerably.

While the timing of the deal appears quick, sources within the cable financial community said talks between the companies began as far back as May.

Officials at Time Warner and AT&T declined comment.

As AT&T moved toward a deal, reports have said other bidders like Apple, The Walt Disney Co. and Google could enter the mix, which could explain AT&T’s hurry. “If AT&T wants this deal, it is in their best interests to move as fast as possible,” wrote Sanford Bernstein media analyst Todd Juenger in a client note Friday.

Whatever the outcome, AT&T will likely have to pay a hefty premium for Time Warner. Reports said a deal could be done for between $95 and $110 per share, a 20% to 40% premium over the programmer’s Oct. 19 closing price.

Time Warner stock, up as much as 10% last Thursday (Oct. 20) when news of the talks first broke, went on another roller coaster ride Friday. Shares were up more than 10% ($8.69 each) to $91.68 per share in early trading Oct. 21, but fell back slightly to

$89.27 (up 7.6%) later in the day.

That is in contrast to two years ago, when Time Warner chairman and CEO Jeff Bewkes beat back an unsolicited $85-per-share bid for the company by 21st Century Fox. At the time, Bewkes and the Time Warner board argued that there was still value to be had in Time Warner. It promptly launched a standalone online version of its HBO premium service — HBO Now — and made several changes to its Turner programming unit.

“Jeff is a seller and he has been for several years,” said one cable financial executive who asked not to be named.

The programming landscape is different than it was in 2014. Consolidation among large distributors has reduced the number of companies that purchase content, and new over-the-top players threaten to further disrupt the pay TV model.

In the meantime, the move toward skinny bundles has put pressure on subscriber rolls of even the largest content companies. Over the past three years, The Walt Disney Co.’s ESPN has shed about 10 million basic-video customers, according to some reports. At the same time, AT&T has been on the hunt for content to help feed its upcoming over-the-top service, Direc-TV Now, scheduled for a fourth-quarter launch.

AT&T is the largest pay TV distributor in the country, with about 25 million customers through its DirecTV satellite and U-verse TV telco platforms. Time Warner is the No. 2 content provider in the U.S. behind Disney, with about $29 billion in revenue and a market cap of $64.6 billion (compared with revenue of $52.5 billion and a $147.9 billion market cap for Disney).

For AT&T, a Time Warner deal would satisfy at least some of its content needs. With HBO, Cartoon Network, TBS, TNT and CNN, Time Warner has some of the top news, sports and entertainment channels in the pay TV universe. The company also owns Warner Bros. Entertainment, home of blockbuster movies like the Harry Potter franchise and Warner Bros. Television Group, which produces TV hits like The Big Bang Theory, Gotham and Westworld. On the surface, the deal would seem to add fuel to a trend toward vertical integration, which at the moment only Comcast-NBCUniversal has successfully managed.

“They [AT&T] seem to be trying to recreate Comcast and have an internal content platform to feed their wireless business, but I don’t understand the move,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said of the AT&T deal. “It is probably a business that will help support their dividend, which seems to be at the forefront of management thinking.”