(Bloomberg) -- The boards of AT&T Inc. and Time Warner Inc. are meeting to discuss an $84 billion deal that would create a media behemoth offering TV, wireless, and the content that goes with it, according to a person with knowledge of the matter.
The companies are discussing a deal in which AT&T would buy Time Warner for about $107.50 a share, 20 percent more than where the stock closed Friday, a person familiar with the deal’s structure said Saturday, asking not to be identified because the talks are private. The price would be paid with an even split between cash and equity. If agreed upon, the acquisition would be the biggest of the year, surpassing Bayer AG’s $66 billion takeover of U.S. seed giant Monsanto Co., announced in May.
Buying Time Warner would give AT&T premium entertainment programming including HBO and the Cartoon Network, which it could offer its millions of pay-TV, mobile phone and Internet subscribers. AT&T Chief Executive Officer Randall Stephenson has been trying to transform the Dallas-based phone company into a media and entertainment giant, and now has one of Hollywood’s top film and TV producers in his cross-hairs.
“It is a knockout bid, which is probably what AT&T intended,” said Jonathan Chaplin, an analyst at New Street Research. “I would be surprised if anyone else could top AT&T’s bid.”
AT&T is pushing to clinch the blockbuster deal to close the door on other potential bidders, another person with knowledge of the matter said Friday. The phone company made a serious bid for Starz earlier this year, and lost. The premium TV network agreed to a $4.4 billion takeover by Lions Gate Entertainment Corp. in June.
Time Warner, the owner of CNN, HBO and the Warner Bros. studio, closed at $89.48 on Friday in New York, giving it a market value of about $70 billion. The stock jumped as much as 5 percent in after-hours trading.
AT&T, the largest U.S. pay-TV company through its ownership of DirecTV, closed at $37.49, giving it a market value of about $231 billion.
Talks between the companies accelerated since Bloomberg first reported Thursday that executives had met in recent weeks to discuss potential business combinations, according to another person familiar. Part of AT&T’s concern is that other suitors such as Alphabet Inc.’s Google or Apple Inc. could jump in, the person said.
Google and Apple are unlikely to pursue bids for Time Warner, according to people with knowledge of those companies’ strategies.
A merger of AT&T and Time Warner will likely be closely scrutinized by regulators, said Roger Entner, an analyst with Recon Analytics LLC in Dedham, Massachusetts. The Federal Communications Commission’s newer rules have restricted growth for carriers in the telecom world and that has driven them to integrate other businesses like television and media, he said in an interview.
“The wild card in all this will be the FCC,” Entner said. “It’s hard to predict what the regulators will do. They are pretty much starting with a blank page.”
A deal for Time Warner would have to begin at a “bare minimum” of $100 a share, Alan Gould, an analyst at Brean Capital, said in a note Friday. His private market value for the company is $123.
“We have always believed that the combination of content and distribution makes sense,” Gould said in the note. Time Warner “has been the greatest content factory for films and TV. Given the rapidly evolving distribution universe, we believe content ownership could be beneficial.”
Time Warner CEO Jeff Bewkes is a willing seller if he gets an offer he thinks is fair, another person said. Until recently, AT&T has been focusing on media and entertainment targets worth from $2 billion to about $50 billion, people familiar with the plans said earlier this month. Time Warner, as one of the most valuable media companies, takes that to a new level.
While Time Warner would give AT&T prime assets like TNT and CNN, along with the Warner Bros. film and TV studio, those businesses are well outside the phone company’s usual strengths and don’t necessarily offer a lot of potential synergies. The company’s current media holdings include the Audience Network, which is part of DirecTV, and Otter Media, a joint venture with former Fox executive Peter Chernin that invests in online video businesses such as Fullscreen Inc.
“They know they’ll have to listen to the people who run these businesses and learn from them,” said Recon’s Entner.
Any deal is likely to include debt and stock, according to Dave Novosel, a bond analyst at Gimme Credit. That means AT&T investors would be asked to swallow additional leverage and a diluted equity stake, a little more than a year after the company acquired DirecTV in a debt-financed deal for $48.5 billion. AT&T, with the third-lowest investment-grade rating, could make a deal work without getting downgraded to junk -- but it would be tough. The company would also have to weigh the implications for its dividend, $1.92 a share over the past year, which has a current yield of 5.1 percent.
AT&T has $120 billion in debt, while New York-based Time Warner had long-term obligations of more than $24 billion.
“I would say it is a great way for Jeff Bewkes to go out in style,” said Frank Biondi, the former chief executive of Viacom Inc. “It is also the best available asset for AT&T in the media.”