AT&T this weekend announced an $85.4 billion mega-merger with content provider Time Warner. While rumors of talks between the two swirled ahead of the reveal, reverberations of shock could be felt in Monday’s discussions and market.
Obviously, a deal as massive as this one comes with a lot of questions. Why did AT&T decide to make this move now? Will the merger make it through regulatory scrutiny? What does this mean for AT&T’s wireless rivals?
Thankfully, though, there was no shortage of thoughts and opinions from industry analysts to answer these burning queries.
Why now?
Craig Moffett and Michael Nathanson of MoffettNathanson on Monday pointed out that the deal comes as AT&T looks to find a solid engine for future growth as its traditional core wireless and wireline businesses fall into stagnation and decline.
In its third quarter earnings report, AT&T revealed its Business Solutions business grew a measly 0.4 percent, its video subscriber base shrank by 0.5 percent year over year and its broadband subscriber base decreased by 1 percent. Even consumer mobility – the segment that was supposed to be AT&T’s growth engine – came in with a 5.9 decrease in total revenues in the quarter. As Moffet and Nathanson said in a separate note, AT&T had to do something to secure its future.
“With its back-to-back acquisitions of first DirecTV and now Time Warner, AT&T is seemingly walking…no, running…from its wireless and wired roots. And no wonder,” Moffett and Nathanson wrote. “For the first time in memory, there is no ‘next big thing’ on the horizon….They need to find a path forward for their core U.S. business that offers something better than inexorable decline.”
While Moffett and Nathanson argued the deal comes without cost synergies, they said it will certainly put AT&T in control of a lot more content and help it diversify its portfolio to face the future.
Will regulatory officials let it happen?
White House Press Secretary Josh Earnest on Monday told reporters in a briefing that while President Obama wasn’t planning to weigh in on the deal, regulatory reviews would likely be conducted by the Department of Justice (DOJ), the Federal Trade Commission (FTC) and possibly the Federal Communications Commission (FCC).
But what are the odds of those agencies waving the merger on?
According to Roger Entner of Recon Analytics, law and precedent would see the deal passed – albeit with certain restrictions.
Entner said one mistake people make when first looking at this merger is mistaking Time Warner for Time Warner Cable. If AT&T was attempting to merge with Time Warner Cable – a cable company in the same business as AT&T – that would present concentration concerns from such a horizontal consolidation. But that’s not actually the case here, he said, because Time Warner is a content company.
“Time Warner is a content owner and thereby it’s vertical integration,” Entner said. “AT&T is entering a new business sector and all the concentration concerns are just not there because the market structure does not change. There might be concerns about AT&T withholding content from other TV competitors, but there can be safeguards for that not to happen – Comcast/NBC committed to just these safeguards. Also there aren’t really any laws against vertical mergers contrary to horizontal mergers. What changes really in the competitive landscape when the number of competitors does not change and they continue to sell to everyone under the same rules? I think the merger should get approved despite the populist uproar. If they go by precedent and the law it should pass with conditions.”
Similarly, Wells Fargo Analyst Jennifer Fritzsche said there would be a “tough fight” for approval and concessions from and conditions for AT&T are likely, but noted historically the DOJ has “never stopped a vertical merger in the telecom/media space.”
What are the industry implications?
Fritzsche tackled this question with gusto in a Monday note.
When it comes to AT&T’s twin telecom titan Verizon, Fritzsche said the impacts of the deal are expected to be minimal. As she pointed out, Verizon hasn’t historically been reactive to AT&T moves and has pinpointed its focus more on mobile content distribution rather than ownership.
However, the merger is expected to reignite merger and acquisition speculation around T-Mobile and Sprint. Neither, though, is expected to pick up any of the remaining major content assets like CBS, FOX or Disney.
On the tower side, Fritzsche foresees more spectrum buys and capital expenditures from AT&T as it works to improve its network to carry all the new content to mobile.
