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What Makes Time Warner Twice As Valuable To AT&T Than DirecTV?

T | October 24, 2016

With AT&T Inc. (NYSE: T) stepping in to lap up Time Warner Inc (NYSE: TWX) in a $108.7 billion cash and stock deal, the Street has got excited over the potential combination. Not long ago, AT&T clinched another deal with DirecTV that provided the former an avenue to circumvent the softness triggered by the saturated U.S. wireless market.

Alfred Fried sees the Time Warner deal as propelling AT&T to the status of the first U.S. mobile provider to have a national bundled mobile broadband and video offering. This deal under works is all about a new frontier that will open, as 115 million U.S. home will not require a cable to get better high speed communications. "We call this 5G mobile," Rich Tullo, director of research at Albert Fried, said in a research note on Monday.

Deal Terms

AT&T would pay $107.50 per share, structured as $53.75 in cash and $53.75 in stock.
In comparison, AT&T's 2014 buyout of cable TV operator DirecTV was valued at $48.5 billion, or $95 per share, with the split up at $28.50 in cash and $66.50 in stock. Including net debt, the deal was valued at $67.1 billion.

Rationale

The DirecTV deal gave AT&T access to television and new video services over-the-top and on mobile devices, with its high-speed broadband network covering 70 million customer locations.
Meanwhile, with the Time Warner deal, AT&T gains foothold into 115 million U.S. homes. Albert Fried sees the deal as a long term positive for AT&T, as it has opportunity to build a 5G multi-channel video program distributor, or MVPD, that will have 100 million TV subscribers and a global reach owing to HBO, and Warner Brothers.
AT&T's planned purchase of Time Warner, with its media assets such as the HBO, CNN, TNT and Warner Brothers film studio, is seen as a marriage between content and distribution.
By owning Time Warner content, AT&T can now leverage, making these available on its DirecTV satellite TV service and also stream the content via its net delivered and wireless DirecTV branded streaming services. This is in addition to the licensing opportunity.

Thus the deal, premised on the logic of delivering content via multiple platforms, is a long term positive for AT&T, making the purchase more valuable than its buyout of DirecTV two years ago.

At last check, AT&T shares were down 1.49 percent at $36.93 and Time Warner shares were down 2.26 percent at $87.46.

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