Why AT&T-Time Warner Deal Could Kickstart More Big Media Mergers

After telecom giant’s $85 billion acquisition, tech giants and China are circling other content-oriented companies

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AT&T’s $85 billion acquisition of Time Warner has put entertainment companies under a much brighter spotlight, as the new wave of distributors battle for ownership of content in a constantly expanding and evolving media universe — with one major player freshly off the market.

The healthy premium AT&T paid — 36 percent higher than Time Warner’s Oct. 19 closing price and a 66 percent markup over where the stock was at the start of the year — could entice more media companies to come to the table, making it the first domino in a series of potential entertainment M&A deals.

With a new direct-to-consumer streaming service coming online seemingly every week, securing prime content to differentiate each offering is crucial. And with deep-pocketed buyers from Apple to China’s Dalian Wanda Group circling, producers of prestige programming could find themselves at the center of a feeding frenzy.

“What we saw over the weekend is a continued convergence and consolidation across sectors which we’re seeing in entertainment and media and technology,” Todson Page, the U.S. Technology Deals Leader at PwC, told TheWrap.

He expects more deals that combine content with the myriad tech and distribution companies that are also dipping more than a toe into media. “Uncertain economy or not, there’s a lot at stake,” he said. “And especially these days, there’s only so many players at scale.”

As the line between media and technology increasingly blurs, Page said both sides could find value in combining. He said tech companies could use their expertise to build a more customized user experience and monetize viewer data — giving them another potential source of revenue.

“There’s still quite a bit of room in that convergence between media companies and technology,” he said. “There’s also things like just enhancing the customer experience. Different ways of monetizing that data beyond just advertising. Those use cases are definitely going to come into play.”

Apple was reported to have had interest in Time Warner, which may have spurred AT&T to act as quickly as it did in closing the transaction. And on Tuesday’s conference call following Apple’s fiscal fourth-quarter earnings, CEO Tim Cook opened the door for purchases in the company’s not-too-distant future.

“We’re open to acquisitions of any size that are of strategic value where we can deliver better products to our customers and innovate more,” Cook said on the call.

Apple has a cool $238 billion in cash, more than the market cap of Disney and Netflix combined, and other tech companies are also resource-rich, Page said. He mentioned the “unicorns” — private companies with valuations in excess of $1 billion — as good candidates to take a serious look at buying content companies.

Snap Inc. — parent of Snapchat — is a unicorn with a growing number of media partnerships, and after raising more than $2.6 billion in venture capital it would appear to have the resources to make a major entertainment purchase.

“There are companies there that have strong brands,” he said. “They’ve got a strong distribution channel and a strong installed user base. One of the options is to monetize that user base with content other than user-generated.”

AT&T’s scoop might also incentivize Chinese buyers — which have been plenty aggressive in acquiring entertainment assets, particularly the Dalian Wanda Group — to lock down even more content.

This year, Wanda acquired Legendary Entertainment for $3.5 billion and is in talks to buy Dick Clark Productions for another $1 billion. And Chinese tech giants Alibaba and Tencent have made content deals of their own. According to a senior executive at a Chinese studio, the prime motivation is to leverage content rights to entice new subscribers to their streaming services and other products.

However, an increasingly skeptical political climate could crimp these plans. In a three-day span earlier this month, members of Congress asked two separate government agencies to take a look at the flurry of acquisitions of U.S. companies by Chinese firms — especially Wanda — and the Washington Post published an op-ed arguing that “it is not far-fetched to assume that China would seek to spread pro-regime propaganda via ownership of U.S. entertainment media.”

“That’s going to be really driven by what happens in our election,” Page said. “And what the message is in Washington coming out of the first and second quarter of next year.”

But even if China’s ambition gets curbed for political reasons, with so many deep-pocketed potential purchasers out there, content creators should be increasingly in the crosshairs of big guns targeting acquisitions. Randall Stephenson, the CEO of AT&T, certainly thinks so.

“The next wave of integration in this business takes vertical integration of premium content and distribution,” he told analysts on Monday. “And I expect the rest of the industry is going to innovate along with us.”

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