The AT&T-Time Warner Merger Will Happen, but Will It Work?

In this segment from the Motley Fool Money podcast, host Chris Hill and senior Motley Fool analysts Jason Moser, Jeff Fischer, and Aaron Bush reflect on the news that a judge has ruled that the merger between AT&T (NYSE: T) and Time Warner can take place without hindrance from the Trump administration’s antitrust regulators.

The result will be a mammoth vertically integrated media empire, and if one such linkup passes muster, more are liable to as well. On the other hand, the last time Time Warner was sold in a much-hailed deal, the results were far from what those involved had hoped for.

A full transcript follows the video.

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This video was recorded on June 15, 2018.

Chris Hill: At long last, a federal judge has given the green light to AT&T’s $85 billion bid to buy Time Warner. There are a lot of ripple effects to this. Jeff, you and I were working here at The Motley Fool back in 2000, when AOL bought Time Warner. You tell me, is this merger going to go better than that one did?

Jeff Fischer: [laughs] That’s the big question. The odds are, it will go better than the AOL-Time Warner merger, which was far premature and just went down in flames, as we all know. What AT&T is obviously trying to do is, it has fiber and a mainly wireless and satellite network. It now wants to deliver its own content over that network to compete with the likes of Netflix and with Disney‘s upcoming streaming service, as well.

Time Warner, same thing. Almost all of Time Warner’s content — which is HBO, Warner Brothers, and Turner, so, a lot of brands that we all know — that’s all delivered through affiliates. They don’t control how and where it’s delivered, in most cases. So, to compete in the age of streaming, you have to merge these two businesses together.

Will it work? I don’t know. There are 12 board members on AT&T’s board, and they have 746 years of experience among them, which is great. That’s a lot of years. The average age is 62, though, so are they seeing where things are going correctly? I don’t know. TV continues to suffer. TV viewing traffic is down an estimated 8% year over year right now in the past week. But, much bigger than that, Chris, are children’s cable networks, where for going on six, seven months in a row now, viewership is down 20-29% year over year. Children are just not watching cable. So, you need to solve that with streaming.

Aaron Bush: I’m a bit skeptical that, 20 years from now, we’re looking back at this being some amazing deal that went through. But, I do think it’s important, because it marks the beginning, probably, of a series of megamergers that will reshape who owns the content that we watch and who owns the mechanisms through which we consume this content.

If you’re like me, I just wanted to get a grasp of, these are two giant companies, what does this even look like? It’s essentially going to be four main business units. It’s going to be the AT&T Communications, which is all the fiber, broadband, mobile, that type of thing; their Media business, which will be new for them; their International business, which is going to be ramped up from this, so this was also a little bit of global play, a little bit, I think. And then, an enhanced Advertising and Analytics business. It’ll be interesting to see how they think about this in terms of advertising, too, I think.

Fischer: You’re right, Aaron, about megamergers. This could make it easier for T-Mobile US and Sprint to merge, and deals with CBS and Viacom. Of course, there’s 21st Century Fox and Disney trying to get together, and Comcast bidding for Fox, as well. Even Express Scripts and Aetna could be green-lighted now. But, I agree with you, I don’t think this is the deal that makes AT&T’s future bright.

Hill: It’s interesting, Jason, because last week on the show, we talked about the letter from Warren Buffett and Jamie Dimon, and their urging public companies to scale back on the short-term outlook. Steve Case, who was the head of AOL and was the head of that merger back in 2000 with Time Warner, he was on TV this week, basically saying, “When I think back on what went wrong, one of the big problems was, we were too focused on the short-term.” It seems like, if this does work out for AT&T, it’s because they’re going to have to be patient about it.

Jason Moser: I mean, there’s no question. It’s one thing to go in there and make deals like these because you have some grand aspirations. But deals like these come with a lot of baggage. You have to figure out how to sort through all this, and you have to have, really, a singular vision of what you want this to be, and make sure that you have a team on board that sees that vision with you. It really does all boil down to leadership.

So, when I think about something like this AT&T deal, I see a lot of reasons for it to go wrong. Jeff was talking about T-Mobile and Sprint. That’s a deal where, I do think it’s going to get approved. Furthermore, I think that’s going to be a really successful outcome because of John Legere, and his success at T-Mobile, his consumer-centric nature. Really, he has laid out a vision, more or less, of what he wants this company to be. I think it would be a very hard case to prove that it wouldn’t benefit consumers, consolidating those three and four players in the space and giving us one more competitive solution to the AT&T and Verizon duopoly that exists today.

Fischer: And here’s an interesting dichotomy, I think, is, these new media giants that own the pipelines and the content, are so weighed down with debt. They’re not very agile, and the target is moving, the target audience, which is mainly younger people, is moving and changing habits and whatnot. Will they meet them where they are? And will that debt become a burden to doing that?

Netflix, for example, by contrast, has menial debt, not much debt yet. And yet, they don’t own the pipeline. So, I would be worried, as bullish as The Motley Fool has been on Netflix for a long time now, we still have to worry about them not having control to the access line to the consumer, aside from streaming through someone else’s pipes.

Aaron Bush owns shares of Netflix and Walt Disney. Chris Hill owns shares of Walt Disney. Jason Moser owns shares of Walt Disney. Jeff Fischer owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

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