Merger mania and global media empires
Time warner was the ultimate prize in media assets on Wall Street, its content, brands and assets second only to Walt Disney. So ATT’s $85 billion cash and stock takeover bid, made possible by a $40 billion syndicated bridge loan underwritten by J.P. Morgan and Bank of America, accelerates the convergence of the media and telecoms constellation if the antitrust lawyers at the Justice Department on the regulators at FCC do not torpedo the deal. It is also significant that both Hilary Clinton and Donald Trump criticized the concentration of power that will accrue to the merged ATT Time Warner colossus with its ownership of the HBO cable channel, CNN, the Warner Brothers movie studio in Hollywood, DC Comics (think Batman, Superman and Wonder Woman), Turner Sports, TNT and so much more.
ATT will be able to use this wealth of media content and brands to transform its “dumb pipes” into the brave new world of interactive television, mobile/digital services and online video streaming. It is now obvious that content, distribution prowess and global economies of scale will create the next generation of media/ entertainment colossi. While politics or the regulators could still scuttle ATT’s bid for Time Warner, this deal will trigger a new generation of media mergers on the New York Stock Exchange.
The model for ATT Time Warner was Comcast’s acquisition of NBC Universal, whose CNBC channel has defined my life from sunrise in Singapore to sunset in Manhattan every trading session since 1997. It is now almost certain that Comcast’s next move could be a bid for a wireless network operator, ideally Sprint or T-mobile. Verizon, the wireless/broadband network Disney’s eSPN subscribers in the US alone operator, acquired AOL and the legacy online business of Yahoo but must now be in the hunt for a global media and entertainment franchise. Merger mania will reshape global media.
The ATT-Time Warner deal is a bitter blow for Australian media billionaire Rupert Murdoch, whose Twenty First Century Fox made an abortive bid for Time Warner. Jeff Bewkes turned down Fox’s $85 a share offer in 2014 because he (rightly) calculated it undervalued Time Warner’s media brands while a Verizon or Sprint would greatly covet News Corp’s media and entertainment assets (cable TV channels, sports, a Hollywood movie studio), it is unthinkable that Lachlan and James Murdoch will break up their octogenarian father’s global empire. Or will the unthinkable become inevitable, like Tolstoy’s revolution, in a post Rupert world? Another strategic prize in the Murdoch empire is Sky, Europe’s preeminent pay television operator, now becomes a more attractive target for its parent or a telecom operator.
Walt Disney’s CEO Bob Iger cannot be unfazed by ATT — Time Warner since subscriber growth at ESPN, the ballast behind Disney’s profit growth is slowing. Disney owns some of the world’s most valuable media assets/brands/ content (think Donald Duck, Mickey Mouse, Goofy, Darth Vader, Marvel, Pixar, Lucas Films etc.!) but “cutting the cord” is an existential reality for the younger generation. I was aghast when my teenage twins said the expensive flat screen TV’s in their rooms were a “waste of space”, that they only consumed news and content on their smartphones. Who said it was easy to be a twentieth century Daddy in a digital world? In any case, Disney needs to buy a global online content distribution network as soon as possible, the rationale for recurrent Wall Street speculation about the ultimate fate of Twitter or Netflix. After all, if the ATT — Time Warner merger happens, the merged firm will generate almost three times Disney’s free cash flow and earnings. With more than 50 million subscribers in the US alone, Disney’s ESPN could well be outbid for sport rights by its new archrival. Angst over cord cutting, ESPN and now the competitive threat from ATT –Time Warner could create the ultimate “deep value” buy point for Walt Disney somewhere near $78 a share.
In 2016, the hot big media investment was Time Warner, up 25 per cent, not the House of Mouse/ Magic Kingdom at Disney. Of course, Time Warner’s fate will now be determined by deal risk. The shares will trade between 85 (Fox’s rejected offer) and $107 (the ATT bid). As usual, option strategies will capture future deal scenarios with nuance and risk control! As Mickey Rourke told Kim Basinger, “he made money with money — some would call it an arbitrage!”