AT&T Eyeing Media Acquisitions as TV Ambitions Grow

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AT&T has gone from a regional phone company to a national telecommunications powerhouse over the past decade. Its next big expansion will see it buying businesses to transform into a media and entertainment giant, according to people familiar with the plans.

Over the next three to five years, AT&T will seek deals to become a producer of programming, shifting its business model so that it owns some of the content it distributes, said the people, who asked not to be identified discussing the company's strategy. The company's targets include companies worth $2 billion to $50 billion, the people said.

Phone companies are trying to figure out their next steps for expansion as wireless growth flattens out and competition with cable providers remains intense. While its main rival Verizon has bet big on mobile advertising, AT&T is more focused on becoming a powerhouse in video programming.

Having become the largest U.S. pay-TV provider through the DirecTV deal, AT&T now faces a new set of challenges -- holding on to TV subscribers in an era of cord-cutting as well as fighting cable networks' attempts to raise prices for their channels. Adding media properties to AT&T's distribution business would give the phone carrier valuable insight for marketers into the viewing habits of its users, just as TV rival Comcast got in the acquisition of NBCUniversal in 2011.

"The landscape has changed so much in the past 10 years. Strategically, going into media makes a lot of sense," said Amy Yong, an analyst with Macquarie Capital USA. "Owning content has become very important, not only for cost benefits but getting a stronger foothold among consumers."

AT&T Chief Executive Officer Randall Stephenson keeps a spreadsheet of about 40 to 45 companies -- a collection of peers and potential takeover targets -- that he studies on his tablet as he plans his next big move, the people familiar with the matter said. When other executives might grab a magazine as they board an airplane, Mr. Stephenson works his list, the people said.

The company made a serious bid for Starz, the premium TV network that agreed to a $4.4 billion takeover by Lions Gate Entertainment in June, the people said. AT&T also took a look at Paramount Pictures, owned by Viacom, before deciding against a bid on the movie studio. Larger deals for major media companies such as Time Warner have some logic, Amir Rozwadowski, an analyst at Barclays Plc, wrote in a Sept. 29 note. AT&T declined to comment on Time Warner.

The move into entertainment won't be easy. A telecommunications giant that rose from the ashes of stodgy old Ma Bell won't fit in well in the glitzy world of Hollywood, and the company could waste billions trying to fit the two cultures together, said a former AT&T executive who was involved with some of the company's largest deals.

Verizon has taken a different tack in media, venturing into digital distribution with go90, a free video-streaming service aimed at teens that hasn't been a breakout success. But with the help of AOL and the pending purchase of Yahoo!, Verizon plans to build a mobile advertising business to rival Google and Facebook.

AT&T took a brief interest in Yahoo but abandoned the effort this summer after concluding that its future was less in digital advertising and more in building its subscription-TV and wireless businesses.

The company's media expansion has begun with small steps. AT&T formed Otter Media with the Chernin Group to bring shows to a young audience as part of a broader online TV offering -- DirecTV Now -- coming by year end.

With $7.2 billion of cash on hand, AT&T doesn't have enough firepower to make a big deal with cash alone. In the wake of the DirecTV purchase and the $18 billion it spent in the federal airwave auction last year, AT&T's net debt was $120 billion at the end of June.

Mr. Stephenson could put together less expensive media deals, but longtime AT&T watchers know its dealmakers' unofficial motto: "If we go, we go big." Recent history is an example. In addition to the $48.5 billion DirecTV buy, AT&T tried but failed to acquire T-Mobile US for $39 billion in 2011. AT&T pulled its bid after U.S. regulators opposed the deal. Not only was the defeat a strategic setback, the breakup penalty was the largest ever, costing AT&T $7 billion worth of cash, airwaves and network-sharing agreements.

Before giving a green light to another deal, Wall Street might need some assurances, said Phil Cusick, an analyst with JPMorgan Chase.

"The DirecTV merger has gone well from a cost standpoint, but investors are still waiting for the top-line results," Mr. Cusick said. "I think if you could prove the DirecTV strategy was right, you could probably get people to trust you on other scope-expanding ventures," he said.

Hopefully AT&T learned from its mistakes if it goes after a big media deal, Mr. Cusick said.

"If I was AT&T, I'd be careful about the breakup fee they'd pay, given the relatively uncertain regulatory environment," he said.

-- Bloomberg News