3 Biggest Hurdles to AT&T’s Time Warner Acquisition

Time Warner’s stock spiked Friday on takeover rumors, but a deal is hardly a slam dunk

Last Updated: October 26, 2016 @ 5:18 PM

AT&T appears to be closing in on a takeover of Time Warner, instantly making the telecom giant a massive player in TV and movies in what would be one of the biggest media deals of all time. The new company would combine DirecTV and AT&T’s internet business with the Warner Bros. studio, Turner cable networks and HBO.

Time Warner’s stock spiked more than 10 percent after a Friday Wall Street Journal report that said a deal could happen as soon as this weekend. AT&T’s shareholders were less excited — its stock is down 3 percent.

Reuters reported later on Friday that the two sides have agreed to a deal in principle at $110 a share. However, there are three major hurdles that could prevent the marriage of AT&T and Time Warner from being consummated:

1. Regulators probably won’t simply rubber-stamp this one

Although the AT&T-Time Warner deal looks a lot like Comcast’s 2011 acquisition of NBCUniversal, which regulators approved with numerous conditions — some think they may want a do-over.

“We think D.C. has had many regrets over [Comcast/NBCUniversal],” Wells Fargo analyst Marci Ryvicker wrote in a Friday research note.

While this deal is different than the proposed merger of Comcast and Time Warner Cable, which regulators put the kibosh on, antitrust regulators may not be so keen on greenlighting another merger of two huge media companies without closer scrutiny of its effect on consumers.

That’s especially true since carriage rates and cable packages have grown more expensive — a main driving force behind the move to “skinny” bundles.

And AT&T should expect regulators to apply plenty of stringent conditions on a merger, as they did with Comcast and NBCU — which could drag out the process and reduce some synergies.

“We presume regulators would require AT&T to maintain arms-length transactions with Turner, HBO and Warner Bros.,” Amy Yong, an analyst at Macquarie, wrote in a Friday note.

2. The price may not be right

AT&T bought DirecTV last year for $49 billion. Time Warner’s market cap is currently $73 billion, and that’s with the stock trading at less than $90 a share. Given that Time Warner CEO Jeff Bewkes rejected an $85-per-share offer from Fox in 2014, it’s likely that it would take more than $100 a share to get a deal done, which would push the deal value north of $85 billion.

That’s two big purchases in two years for a company that itself has a market cap of just $227 billion, and has only $7.2 billion in cash on its balance sheet.

“This is a BIG deal for (AT&T) (maybe too big),” Ryvicker wrote.

Also, given Time Warner’s already substantial debt load and the fact that AT&T borrowed heavily to finance its DirecTV acquisition, AT&T is limited in its ability to finance the deal by issuing more debt.

3. AT&T might be buying at the top

Time Warner’s stock has surged this year, as Warner Bros. has bounced back from a disappointing 2015, where it placed fourth in market share, to claim the No. 2 spot — trailing just Disney, which is on a record box office pace. In addition, America’s colorful election has caused ratings and ad revenue at CNN to soar.

However, that could also mean that AT&T is buying high. CNN may have caught lightning in a bottle with the sheer — and sometimes grotesque — entertainment value of this election. Also, Turner’s TNT signed a 9-year, $24 billion deal for rights to the National Basketball Association, along with ESPN, that kicks in this year.

Those hurdles aside, an AT&T scoop of Time Warner gives it a leading TV and film studio, some of the country’s most popular cable channels, and a premium prestige TV network as it prepares to launch four over-the-top streaming services.

And as TV adapts to an online environment with new downstream providers popping up all the time — including Hulu, in which Time Warner has a 10 percent stake — the limited supply of upstream content is more important than ever.

However, the promise of such a deal may not make it past the realities of the obstacles in its way.

“We don’t think [a transaction] is imminent,” Ryvicker wrote.