January 30, 2017    6 minute read

Why CNN Won’t Affect the Time Warner Deal

Network Interference    January 30, 2017    6 minute read

Why CNN Won’t Affect the Time Warner Deal

Media giant CNN has never failed to inform, alert, and entertain. The news media is respected as it conducts constant checks upon the government through news coverage on politics so that it knows the public is watching. The media has the authority granted and the force gathered by the general public outside the government to balance the separation of power within the government.

Recent controversies over the presidential campaign and taking office gave rise to conflicts between CNN and the new ruling US presidential administration. Behind CNN stands its parent company Time Warner, the world’s third-largest media conglomerate, after Comcast and Disney.

While CNN seems troubled, will it affect the planned union of two families, the media titan Time Warner and telecoms titan AT&T?

Expanding and Conquering

The technology, media, and telecom industries have symbiotic relationships. Telecom companies provide infrastructure, technology companies provide platforms, and media companies create the bread and butter. The first wave of revolution in media space is the transformation from print to digital media by the invention of PC and internet.

The second wave was driven by technology companies such as Facebook, Instagram, and Twitter that created a concept of social media, where contents are interactive, personal, and generated, distributed, shared and consumed within broader communities by the invention of Web 2.0.

The third and newest wave was driven by technology products such as Netflix, Amazon Prime and Hulu Plus that introduced on-demand service to the media industry through the subscription-based streaming model and over-the-top content (OTT) distribution technology.

The concept of on-demand service in new media moves contents from big screens to on-the-go mobile devices including smartphone, tablets and avant-garde wearables to provide more flexible, connected and personalised user experience.

$146.8bnAT&T’s 2015 revenue

AT&T is the largest telecommunications company in the world by revenue of $146.8bn in 2015, an industry leader in providing high-speed broadband internet network and mobile wireless services. Following the waves of technology innovations in media, the telecoms company started its own growth expansion through integration with media.

AT&T’s ambition to expand into the on-demand streaming media business kicked off in 2014. The company acquired DirectTV with a $48.5bn equity offering. It also paid $18.6bn for DirectTV’s leading market shares in digital media space, with over 20 million customers in the US and 18+ million customers in Central and South America high growth markets.

After the successful acquisition of DirectTV, AT&T has set its eyes on its next target in the same media industry, Time Warner, in order to replicate its success and further boost its strengths in the new media market.

A Win-Win Strategy

Time Warner shareholders are being offered $107.50 per share. The stock portion will be protected by a collar strategy to give the acquirer, AT&T, a protection by setting up an upper bound exchange ratio in case its stocks unexpectedly drop too low.

At the same time, giving the target Time Warner shareholders a protection by setting up a lower bound exchange ratio in case AT&T’s stocks go up too high on transaction day. Time Warner’s equity is valued at $85.4 billion. The total transaction is estimated at $108.7 billion, including $23.3 billion net debt.

Why is AT&T so attractive to Time Warner? The feeling is mutual. Many viewers are big fans of HBO’s original series Game of Thrones, True Blood, Sex and the City. Many sports lovers are loyal to TBS’s Major League Baseball (MLB), NBA and National Collegiate Athletic Association (NCAA) tournaments.

All these channels, along with many others, are Time Warner’s assets. What Time Warner has to offer, which is also what AT&T is looking for, is its original, unique and premium content.

135mtotal number of AT&T’s mobile customers

On the other hand, what Time Warner is looking for is to serve its existing customers’ growing demand to access these premium content in a more convenient, flexible and personalised way, and to reach out to new customers on the mobile platform.

Both goals can be achieved through the engagement of AT&T, which offers high-performing LTE-Advanced wireless network-empowered mobile services and a solid 135 million mobile customers.

The vertical merger of the two companies is a win-win strategy. Their complementary products and services create cross-selling opportunities and diversified bundles options for customers. Consolidated products increase customer brand loyalty. These are the key drivers for the revenue synergy of the proposed combined company.

While their shared technologies, intellectual properties, and capital expenditure mean cost synergies are expected to reach $1 billion within three years of the deal closing. Adjusted EPS and cash flow per share for the combined company are both expected to be accretive within one year of the deal closing – enough to justify the corporate action of a merger.

The boards of directors of both companies unanimously approved the deal.

Consumers Win Too

What’s in it for customers? First of all, they will gain access to a one-stop shop for wireless and mobile services as well as media and entertainment products. Secondly, the merger of the two companies enables them to access trendy on-demand media streaming experiences.

Thirdly, by leveraging the mobile platforms that track our behaviours, preferences, and habits, they will be provided with more personalised content and relevant advertising experience. From the price perspective, as active competitors are added to the market along with existing industry pioneers Netflix, Amazon Prime, Hulu Plus, and Now TV, consumers will likely enjoy more options at a lower price.

Also, since the targeted advertising is more convincing and effective, it’s possible to offload some cost from consumers to advertisers who will be willing to pay extra for the extra benefits. One extra bonus that will be given by AT&T is the zero-rating option that gives unlimited data roaming on certain media streaming. Who wouldn’t appreciate free light-speed data?

The acquisition will be a win-win-win strategy for AT&T, Time Warner, and consumers. The deal, though, still needs the approval from US Department of Justice and Federal Communication Committee. The main concern from the government is whether the union of the two companies will violate antitrust regulations.

AT&T has assured the public that benefits and discounts will be offered to customers for newly structured and bundled products while no less favour will be taken away from customers and competitors that decide not to change their plans.

AT&T CEO Randall Stephenson said on Wednesday, January 25th that he is well aware of the extra attention brought to the deal due to Time Warner’s “troubled” child CNN. But Randall will not give up on the news broadcaster because it’s irrelevant to the antitrust audit, and the US president is not expected to hold a personal grudge against the company or prevent the deal from moving forward. One can only hope that the deal will meet its target to close by the end of 2017.

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