For the exclusive use of J. Vardilos, 2022.

W19651

THE $85.4 BILLION MERGER OF AT&T AND TIME WARNER:

VALUATION ANALYSIS1

Professors Xiaokang Zhao and Frank Li wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Our goal is to publish
materials of the highest quality; submit any errata to [email protected]. i1v2e5y5pubs

Copyright © 2019, Ivey Business School Foundation and Donghua University Version: 2020-02-04

On October 22, 2016, Janey Frank, a portfolio manager at Uria Investment, was shocked by an
announcement made in a conference call by Jeff Bewkes, the chairperson and chief executive officer (CEO)
of US television media giant Time Warner Group (Time Warner). Bewkes stated that Time Warner would
soon merge with the telecommunications (telecom) operator AT&T Inc. (AT&T), formerly American
Telephone and Telegraph Company. AT&T would acquire Time Warner for US$107.502 per share, half in
cash and half in stock.3 In a report Time Warner filed, as required by the US Securities and Exchange
Commission (SEC), Bewkes made the following statement:

This transaction is an excellent outcome for our shareholders and it’s an excellent opportunity to
drive long-term value into the future. We believe combining with AT&T is the natural next step in
the evolution of our business and it is one that allows us to significantly accelerate our most
important strategies. We believe that putting these complementary businesses together will drive
innovation and accelerate the transition of the ecosystem to more and better choices for consumers.4

Time Warner also announced that the two companies had started formal negotiations as early as August
2016 and were expected to complete the deal in 2017. The merger between one of the largest distributors
of content and one of the biggest producers of content, if approved in the antitrust trials that followed, would
be the largest global acquisition during the year.5

AT&T agreed to buy Time Warner’s total equity of 783.8 million outstanding shares for $85.4 billion.
Together with Time Warner’s net debt, this would cost AT&T $108.7 billion, the total enterprise value.
Before the merger was announced, Time Warner’s stock price was $79.50 per share; the acquisition price

1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of AT&T Inc. or Time Warner Group, or any of the employees.
2
All currency amounts are in US$ unless otherwise specified.
3
“AT&T to Acquire Time Warner,” news release, AT&T, October 22, 2016, accessed March 27, 2019,
http://about.att.com/story/att_to_acquire_time_warner.html.
4
Time Warner Inc., “Form 425, Pursuant to Rule 425 under the Securities Act of 1933 and Deemed Filed Pursuant to Rule
14a-12 under the Securities Exchange Act of 1934,” US Securities and Exchange Commission, 2016, accessed February 26,
2019, www.sec.gov/Archives/edgar/data/1105705/000110570516000031/form425.htm.
5
Roger Yu, “AT&T Agrees to Buy Time Warner for More than $80B,” USA Today, October 22, 2016, accessed June 25, 2019.
www.usatoday.com/story/money/2016/10/22/reports-t-agrees-buy-time-warner-more-than-80b/92589816/.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 2 9B19N022

of $107.50 implied a 35 per cent premium.6 If Time Warner were to break the deal and allow other
companies to become involved in the bidding, it would have to pay AT&T $1.725 billion. On the other
hand, if the antitrust agency were not to approve the deal, causing the termination of the buyout, then AT&T
would have to pay Time Warner $500 million.7

Frank was trying to anticipate the future of the merged firm, as AT&T equity represented a significant
portion of her investment portfolios. She wondered if the merger would be costly or problematic for the
acquirer’s investors. In 2016, so far, numerous acquisitions had greatly benefited shareholders of the
acquired firm at the expense of the acquirer’s investors, including the $3.8 billion acquisition of
DreamWorks Animation by Comcast Corporation (Comcast) and the $2.8 billion acquisition of
Demandware Inc. by Salesforce.com Inc.8 Investors had already started contacting Frank about the future
of the company and the state of their investments. She needed to act fast to mitigate any potential loss of
value for her investors, so she decided to make a thorough valuation analysis.

DEAL STRUCTURE

In the merger, all of Time Warner’s shareholders would receive $107.5 per share—$53.75 per share in cash
and $53.75 per share in AT&T stock. If AT&T’s average share price was less than $37.411 at the close of
the transaction, Time Warner’s shareholders would receive a fixed price of 1.437 AT&T shares per share.
If AT&T’s average share price was in the range of $37.411 and $41.349, then the exchange ratio would be
an amount equal to the quotient obtained by dividing $53.75 by the average AT&T stock price. If AT&T’s
share price was higher than $41.349 per share, Time Warner’s shareholders would receive AT&T shares at
a fixed price of 1.300 per share.9

To raise the cash needed to fund half of the $85.4 billion deal, AT&T planned to apply for bridge loans of $25
billion and $15 billion, respectively, from JPMorgan Chase & Co. and Bank of America Merrill Lynch.10

THE ACQUIRER: AT&T

Headquartered in Dallas, Texas, AT&T had previously been known as the American Bell Telephone
Company and included the Bell Telephone Company founded by telephone inventor Alexander Graham
Bell in 1880. In 1984, AT&T spun off its local telephone service and kept equipment manufacturing
enterprises Western Electric and Bell Laboratories, as well as the most profitable long-distance services;
Southwestern Bell Communications (SBC) had its origins in this reorganization.11 The United States

6
Time Warner Inc., op. cit.
7
Todd Spangler, “Time Warner Would Pay AT&T $1.73 Billion Breakup Fee if Merger Is Pulled,” Variety, October 24, 2016,
accessed March 27, 2019, https://variety.com/2016/biz/news/time-warner-att-breakup-fee-merger-1201898492.
8
David Trainer, “AT&T Time Warner Acquisition a Rare Deal that Makes Economic Sense,” Forbes, November, 15, 2016,
accessed June 25, 2019, www.forbes.com/sites/greatspeculations/2016/11/15/att-time-warner-acquisition-a-rare-deal-that-
makes-economic-sense/#7e7270cb11fa.
9
Time Warner Inc., “Form 8-k, Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,” US Securities and
Exchange Commission, October 22, 2016, accessed June 25, 2019,
www.sec.gov/Archives/edgar/data/1105705/000095015716002366/form8k.htm.
10
Thomas Gryta, Keach Hagey, Dana Cimilluca, and Dana Mattioli, “AT&T: Reaches Deal to Buy Time Warner for More than
$80 Billion—3rd Update,” Marketscreener， October 22，2016， accessed June 26, 2019, www.marketscreener.com/AT-T-INC-
14324/news/AT-T-Reaches-Deal-to-Buy-Time-Warner-for-More-Than-80-Billion-3rd-Update-23257264/.
11
AT&T, “Brand-Licensing, Evolution and Doman Names,” accessed June 25, 2019,
https://about.att.com/innovation/ip/brands/history

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 3 9B19N022

telecommunications law of 1996 led to a major change in the competitive landscape.12 SBC expanded its
operations in the United States through a series of acquisitions, including the acquisition of Pacific Telesis
Group in 1997 and the acquisition of Ameritech Corporation in 1999. In 2005, SBC purchased AT&T and
took on its branding, with the merged entity naming itself AT&T Inc. and using its iconic logo and stock-
trading symbol.13

AT&T was the largest telecom company and fixed-line telephone service provider in the United States, as
well as the largest mobile phone service provider in the United States and the second-largest mobile service
provider in the world. The company’s businesses included wireless communications; local exchange
services; remote services; data, broadband, and Internet services; video services; telecommunications
equipment; network management; wholesale services; and catalogue advertising and publishing services.
AT&T also provided broadband and satellite television (TV) services, and had about 135 million wireless
subscribers in the United States in 2016, which made it the world’s largest telecom company.14

AT&T operated in four main business sectors (see Exhibit 1). In enterprise solutions, its main businesses
were wireless services, strategic services, traditional voice and data services, and wireless devices. In
consumer mobile services, it provided consumer service and equipment. In entertainment and Internet
services, it offered video entertainment, high-speed Internet, and traditional data services. Finally, its
international business segment provided video and wireless services in Latin American countries such as
Brazil and Argentina.

AT&T was committed to expanding its mobile Internet business through a series of mergers and
acquisitions. It had purchased the number-three Mexican carrier Iusacell for $2.5 billion in late 2014, and
two months later, it purchased the Mexican telecom operator Nextel Mexico for $1.88 billion. 15 The two
acquired companies formed AT&T Mexico and helped AT&T enter the Latin American market. With the
development of mobile Internet and social media, as well as changes in consumers’ video-watching habits,
AT&T had also started to enter the video field. In 2014, AT&T and the Chernin Group jointly purchased
Fullscreen, YouTube’s premier content provider.16 In 2015, AT&T acquired DIRECTV, the largest US
satellite TV provider, for $48.5 billion and became the nation’s largest pay-TV company, generating
significant revenue growth for its entertainment business.17

THE TARGET: TIME WARNER

Founded in 1990, Time Warner was headquartered in New York. Originally a magazine publisher, it had
grown to become one of the world’s top entertainment media companies after a number of mergers and
acquisitions. The Warner brothers—Harry, Albert, Sam, and Jack Warner—started the first Warner Brothers
Studio in 1918 on Sunset Boulevard in Hollywood. In 1923, they formally established Warner Bros.
12
Staff member of National Telecommunications and Information Administration (NTIA), “The United States
Telecommunications Act of 1996, Global Communications Interactive ‘98,” accessed July 11, 2019,
www.ntia.doc.gov/legacy/opadhome/overview.htm.
13
“SBC Completes Purchase of AT&T”, NBC News, accessed August 22, 2019, www.nbcnews.com/id/10100350/ns/business-
us_business/t/sbc-completes-purchase-att/#.XV7ulehKg0I.
14
AT&T Inc., AT&T Inc. Financial Review 2016, accessed July 11, 2019,
www.att.com/Investor/ATT_Annual/2016/downloads/att_ar2016_mda_consolidatedtables.pdf.
15
“NII Holdings agrees to sell operations in Mexico to AT&T for $1.88 billion” Washington Post, accessed August 22, 2019,
www.washingtonpost.com/business/capitalbusiness/nii-holdings-agrees-to-sell-operations-in-mexico-to-atandt-for-188-b/2015/01/
26/eb68ab00-a574-11e4-a7c2-03d37af98440_story.html?noredirect=on.
16
“AT&T-Chernin J.V. Otter Media Buys Out Remaining Fullscreen, Crunchyroll Owners,” Variety, accessed July 11, 2019,
https://variety.com/2018/digital/news/att-chernin-j-v-otter-media-buys-out-remaining-fullscreen-crunchyroll-owners-1202675621/.
17
“AT&T to Buy DirecTV for $48.5 Billion in Move to Expand Clout,” New York Times, accessed July 11, 2019,
https://dealbook.nytimes.com/2014/05/18/att-to-buy-directv-for-48-5-billion/.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 4 9B19N022

Entertainment Inc. (Warner Bros.) In the same year, Henry Luce and his Yale schoolmate Briton Hadden
founded Time Inc. to publish the first weekly news magazine in the United States, Time magazine. Since the
1950s, Time Inc. had expanded into other fields, investing in the broadcast TV and cable TV networks Home
Box Office (HBO) and Cinemax. In 1990, Time Inc. acquired Warner Communications Inc. for $14 billion
to eventually form Time Warner.18 Time Warner had a history of expanding and adapting through mergers
and acquisition. In 1996, Time Warner merged with Turner Broadcasting System Inc., the largest cable
television company at that time, and become a leading player in the television distribution industry.19

At the time, Time Warner was the world’s third-largest entertainment company, after The Walt Disney
Company and Comcast. Time Warner operated the following companies (see Exhibit 2 for their shares):
(1) HBO, an American premium cable and satellite television network with subscription services and
content authorization as its main sources of revenue; (2) Turner Broadcasting System, a media network that
generated revenue through subscription, advertising, and content authorization services and included brands
such as CNN, HLN, TNT, TBS, Cartoon Network, Turner Classic Movies, truTV, and Turner Sports; and
(3) Warner Bros., which received revenue mainly from copyrights for the production and distribution of
movies, television, video games, sales of peripheral products, and home entertainment on demand.

Amid the dot-com bubble of 2000, and in search of opportunities for Internet development, Time Warner
merged with AOL (formerly, America Online), the world’s largest Internet service provider. However, the
merger ended with a huge loss, and AOL withdrew in 2009. In 2014, Time Warner sold its Time Warner
Cable segment to Comcast, then the nation’s largest cable television company, for $45 billion.20 Time
Warner subsequently focused on its film, television production, and cable TV channels. In July of the same
year, 21st Century Fox Inc. offered $80 billion to acquire Time Warner, but Time Warner rejected this
bid.21 In recent years, Time Warner’s financial numbers had been relatively stable (see Exhibits 3–5).

INDUSTRY BACKGROUND

The history of the telecommunications industry in the United States dated back to 1876, when Bell applied
for the first telephone patent. After more than 120 years of development, it had become an important pillar
of the American national economy. The early telecom industry had experienced periods of patent
monopoly, regulatory monopoly, and free competition, one after the other. In 2016, the US telecom industry
became a fully competitive market represented by telecommunications companies such as Verizon
Communications Inc. (Verizon), AT&T, DIRECTV, Comcast, and Time Warner Cable.

The telecom industry was also expanding into new business lines: from the early telephone and telegraph
services, it had grown to include wireless communications, satellite communication services, radio and TV
transmission businesses, cellular communications, and data communication services. However, by the 21st
century, the markets for cell phone service, home Internet access, and cable TV services had become
increasingly saturated in the United States. More people were choosing to watch online video programs

18
Steven Mufson, “Time Buys Warner for $14 Billion,” Washington Post, July 25, 1989, accessed July 11, 2019,
www.washingtonpost.com/archive/politics/1989/07/25/time-buys-warner-for-14-billion/3db3e59f-4e1d-4000-aa2b-33e12d97
d027/?noredirect=on; Time Warner Inc., “Company Profile, Information, Business Description, History, Background
Information on Time Warner Inc.,” accessed July 11, 2019, www.referenceforbusiness.com/history2/83/Time-Warner-Inc.html;
Warner Bros., “Company History,” accessed July 11, 2019, www.warnerbros.com/studio/about-studio/company-history.
19
Thomas S. Mulligan, “Turner-Time Warner Merger Approved by Shareholder,” Los Angeles Times, October 11, 1996,
accessed July 11, 2019, www.latimes.com/archives/la-xpm-1996-10-11-fi-52676-story.html.
20
Sam Gustin, “Comcast Set to Buy Time Warner Cable for $45 Billion,” Time, February 12, 2014, accessed July 11, 2019,
http://business.time.com/2014/02/12/comcast-time-warner-cable/.
21
Andrew Ross Sorkin, “Time Warner Rejected $80 Billion Offer from 21st Century Fox: Sources,” CNBC, July 16, 2014,
accessed July 11, 2019, www.cnbc.com/2014/07/16/time-warner-rejected-80b-offer-from-21st-century-fox-sources.html.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 5 9B19N022

and, consequently, subscriptions to cable TV services were decreasing. Given this scenario, traditional
telecom operators were reluctant to act as conduits to allow customers to access the Internet; they hoped to
gain more advertising income and subscription revenue through digital content. Therefore, mergers and
acquisitions of media companies that included both content and delivery had become a new trend in the
industry (see Exhibit 6).22

For example, AT&T’s main competitor, Verizon, was at the time heavily engaged in the acquisition of
Internet companies. In 2015, Verizon spent $4.4 billion to acquire AOL. In February 2017, Verizon signed
an agreement with Yahoo! Inc. that saw it acquire Yahoo!’s core portal and search engine businesses for
$4.8 billion. Verizon executives had made it clear that, as the telecom market became increasingly saturated
and fiercely competitive, Verizon expected more revenue from Internet content and online advertising.23

Similarly, the US media industry had undergone major changes in recent years. Its focus had expanded from
traditional media such as newspapers, TV and radio broadcasting, book and magazine publishing, and film to
include new media such as Internet- and mobile-based social media and online video. In the context of the
rapid development of the Internet, the survival of traditional media outlets was increasingly called into
question, and the development of new media seemed irresistible. In terms of advertising revenue, new, online
media in the US advertising market continued to gain market share in 2016, while that of traditional media
such as TV and newspapers was rapidly shrinking (see Exhibit 7).24

CONTROVERSIES ABOUT THE MERGER

As the largest mergers and acquisitions case in 2016, the AT&T–Time Warner deal attracted attention as
soon as it was announced. To alleviate the concerns of the public and some investors, AT&T’s CEO,
Randall Stephenson, and Time Warner’s Bewkes held a press conference to provide more information and
further justify the decision.25

According to Bloomberg, AT&T already had a large number of home TV subscribers and many mobile and
broadband subscribers through fixed telecommunications networks and DIRECTV. Through this merger
with the top content provider, AT&T hoped to bring more high-quality video content to these subscribers.26

However, at an estimated price of $85.4 billion, the deal was seen by many in the industry as too expensive
and prompted comparisons with the failed transaction between Time Warner and AOL, which had been
priced at up to $160 billion. A Fortune magazine article mocked the deal directly: “The first rule of mergers
is don’t do a deal with Time Warner. The second rule, as they say, is that there is only one rule.” 27 While
Bloomberg’s intelligence was more objective, its report said that the deal value was about 13 times Time

22
Jurgen Meffert and Niko Mohr, “Overwhelming OTT: Telcos’ Growth Strategy in a Digital World,” McKinsey & Company,
January 2017, accessed November 26, 2019, www.mckinsey.com/industries/technology-media-and-telecommunications/our-
insights/overwhelming-ott-telcos-growth-strategy-in-a-digital-world
23
Lara O’Rellly, “Verizon Will Acquire Yahoo for $4.8 Billion,” Business Insider, accessed July 11, 2019,
www.businessinsider.sg/verizon-acquires-yahoo-2016-7/?r=US&IR=T.
24
“US Online and Traditional Media Advertising Outlook, 2016–2020,” Marketing Charts, accessed July 11, 2019,
www.marketingcharts.com/featured-68214.
25
Time Warner Inc., “Pursuant to Rule 425 under the Securities Act of 1933 and Deemed Filed Pursuant to Rule 14a-12 under
the Securities Exchange Act of 1934,” US Securities and Exchange Commission, accessed July 11, 2019,
www.sec.gov/Archives/edgar/data/1105705/000095015716002368/form_425.htm.
26
Ed Hammond, Alex Sherman, and Scott Moritz, “AT&T Discussed Idea of Takeover in Time Warner Meetings,” Bloomberg,
October 20, 2016, accessed April 5, 2019, www.bloomberg.com/news/articles/2016-10-20/at-t-said-to-discuss-idea-of-
takeover-in-time-warner-meetings.
27
Stephen Gandel, “AT&T’s Time Warner Deal Comes at a Huge Cost,” Fortune, October 24, 2016, accessed April 6, 2019,
http//fortune.com/2016/10/24/att-time-warner-deal-share-price.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 6 9B19N022

Warner’s earnings before interest, taxes, depreciation, and amortization (EBITDA), setting a new record in
the media industry.28

Forbes magazine experts said they rarely “liked” acquisitions, in terms of the value they created for
acquirers, and were often left “disappointed by how much the acquiring company overpays. 29 AT&T
would pay $108.7 billion to acquire $5.1 billion of Time Warner’s net operating profit after tax. According
to the Forbes article, the return on invested capital (ROIC) would be 4.7 per cent, marginally improving
AT&T’s current ROIC of 4.6 per cent and equal to its weighted average cost of capital of 4.7 per cent. This
deal would modestly improve AT&T’s overall ROIC.30

Frank had to evaluate these differing opinions, and she needed to conduct a valuation analysis
independently. She first collected data on previous comparable mergers (see Exhibit 6) and on comparable
major competitors of Time Warner (see Exhibit 7). She found Time Warner’s EBITDA for the trailing 12
months, which was $8,790 million, and its earnings-per-share ratio as of September 30, 2016, which was
4.62. She also obtained all the firm fundamental information she could find about Time Warner (see Exhibit
8). Frank believed that the synergies from the merger would potentially help Time Warner maintain 8 per
cent growth in free cash flow for the following five years, based on the company’s historic average growth
rate. However, she also thought that a more modest 7 per cent growth rate for the next five years would be
more realistic. For the terminal growth rate after the fifth year, Frank decided she would follow the common
practice of the majority of the financial analysts who covered the media industry and use 3 per cent.

Frank would call the AT&T and Time Warner CEOs without hesitation if she had any questions. But with
all the information she had collected so far, she believed that she was ready to work on the valuation of
Time Warner. Then, she would need to defend her valuation analysis in front of her investors.

28
Tara Lachapelle, “AT&T–Time Warner: Rethink Possible. Buying Time Warner Is Risky, But It also May Be Necessary,”
Bloomberg, October 23, 2016, accessed April 6, 2019, www.bloomberg.com/opinion/articles/2016-10-24/at-t-time-warner-
deal-is-risky-but-may-be-necessary.
29
David Trainer, “AT&T Time Warner Acquisition a Rare Deal that Makes Economic Sense,” Forbes, November 15, 2016,
accessed April 6, 2019, www.forbes.com/sites/greatspeculations/2016/11/15/att-time-warner-acquisition-a-rare-deal-that-
makes-economic-sense/#7122464911fa.
30
Ibid.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 7 9B19N022

EXHIBIT 1: DEPARTMENTAL OPERATIONS OF AT&T IN 2016 (IN US$ MILLIONS)

80,000
70,988
70,000

60,000
51,295
50,000

40,000 33,200
30,000 26,658

20,000 13,541
11,957
10,000 7,283
453
0
Revenue EBITDA Revenue EBITDA Revenue EBITDA Revenue EBITDA
Enterprise Solutions Entertainment and Cosumer Mobile International
internet Services Services Business

Note: EBITDA = earnings before interest, taxes, depreciation, and amortization

Source: Created by the case authors using data from AT&T Inc., “Form 10-Q, Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934,” US Securities and Exchange Commission, November 3, 2016, accessed July
12, 2019, www.sec.gov/Archives/edgar/data/732717/000073271716000233/q3_10q.htm.

EXHIBIT 2: DEPARTMENTAL OPERATIONS OF TIME WARNER IN 2016 (IN US$ MILLIONS)

14,000 13,037

12,000 11,364

10,000

8,000
5,890
6,000
4,580
4,000
2,005 2,081
2,000

0
Revenue EBITDA Revenue EBITDA Revenue EBITDA
HBO Turner Broadcasting Warner Brothers
System

Note: EBITDA = earnings before interest, taxes, depreciation, and amortization

Source: Created by the case authors using data from Time Warner Inc., “Form 10-Q, Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934,” US Securities and Exchange Commission, November 2, 2016, accessed
July 12, 2019, www.sec.gov/Archives/edgar/data/1105705/000119312516756548/0001193125-16-756548-index.htm.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 8 9B19N022

EXHIBIT 3: TIME WARNER INC., CONSOLIDATED BALANCE SHEET

In US$ millions, except per-share amounts 2016 2015 2014

ASSETS
Current Assets
Cash and Equivalents 1,539 2,155 2,618
Receivables, Less Allowances of $981 and $1,055 8,699 7,411 7,720
Inventories 2,062 1,753 1,700
Deferred Income Taxes / / 184
Prepaid Expenses and Other Current Assets 1,185 1,194 958
Total Current Assets 13,485 12,513 13,180
Non-Current Inventories and Theatrical Film and Television 7,916 7,600 6,841
Production Costs
Investments, Including Available-for-Sale Securities 3,337 2,617 2,326
Property, Plant and Equipment, Net 2,510 2,596 2,655
Intangible Assets Subject to Amortization, Net 783 949 1,141
Intangible Assets Not Subject to Amortization 7,005 7,029 7,032
Goodwill 27,752 27,689 27,565
Other Assets 3,178 2,855 2,406
Total Assets $65,966 $63,848 $63,146
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities $7,192 $7,188 $7,507
Deferred Revenue 564 616 579
Debt Due Within One Year 1,947 198 1,118
Total Current Liabilities 9,703 8,002 9,204
Long-Term Debt 22,392 23,594 21,263
Deferred Income Taxes 2,678 2,454 2,204
Deferred Revenue 486 352 315
Other Non-Current Liabilities 6,341 5,798 5,684
Redeemable Non-Controlling Interest 29 29 /
Equity
Additional Paid-In Capital 146,780 148,041 149,282
Treasury Stock, at Cost (880 Million and 857 Million Shares) (47,497) (45,612) (42,445)
Accumulated Other Comprehensive Loss, Net (1,510) (1,446) (1,164)
Accumulated Deficit (73,455) (77,381) (81,214)
Total Time Warner Inc. Shareholders’ Equity 24,335 23,619 /
Non-Controlling Interests 2 / /
Total Equity 24,337 23,619 24,476
Total Liabilities and Equity $65,966 $63,848 $63,146

Source: Excerpted from Time Warner Inc., 2016 Annual Report, 60, 2017 and 2015 Annual Report, 71, US Securities and
Exchange Commission, 2016, accessed February 8, 2019, http://annualreports.com/HostedData/AnnualReportArchive/t/NYS
E_TWX_2016.pdf. and www.sec.gov/Archives/edgar/data/1105705/000119312516477965/d280491d10k.htm#tx280491_3.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 9 9B19N022

EXHIBIT 4: TIME WARNER INC., CONSOLIDATED STATEMENT OF OPERATIONS

In US$ millions, except per-share amounts 2016 2015 2014

Revenues 29,318 28,118 27,359
Costs of Revenues (16,376) (16,154) (15,875)
Selling, General, and Administrative (5,123) (4,824) (5,190)
Amortization of Intangible Assets (190) (189) (202)
Restructuring and Severance Costs (117) (60) (512)
Asset Impairments (43) (25) (69)
Gain (Loss) on Operating Assets, Net 78 (1) 464
Operating Income 7,547 6,865 5,975
Interest Expense, Net (1,161) (1,163) (1,169)
Other Loss, Net (1,191) (256) (127)
Income from Continuing Operations before Income Taxes 5,195 5,446 4,679
Income Tax Provision (1,281) (1,651) (785)
Income from Continuing Operations 3,914 3,795 3,894
Discontinued Operations, Net of Tax 11 37 (67)
Net Income 3,925 3,832 3,827
Less Net Loss Attributable to Non-Controlling Interests 1 1 —
Net Income Attributable to Time Warner Inc. Shareholders $3,926 $3,833 $3,827
Average Basic Common Shares Outstanding 780.8 814.9 863.3
Average Diluted Common Shares Outstanding 792.3 829.5 882.6
Cash Dividends Declared per Share of Common Stock $1.61 $1.40 $1.27

Source: Excerpted from Time Warner Inc., 2016 Annual Report, 61–62, 2017, accessed February 8, 2019,
http://annualreports.com/HostedData/AnnualReportArchive/t/NYSE_TWX_2016.pdf.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 10 9B19N022

EXHIBIT 5: TIME WARNER INC., CONSOLIDATED STATEMENT OF CASH FLOWS

(In US$ millions) 2016 2015 2014

OPERATIONS
Net Income $3,92 $3,83 $3,82
Less Discontinued Operations, Net of Tax (11) (37) 67
Net Income from Continuing Operations 3,914 3,795 3,894
Adjustments for Non-Cash and Non-Operating Items:
Depreciation and Amortization 669 681 733
Amortization of Film and Television Costs 8,324 8,030 8,040
Asset Impairments 43 25 69
Venezuelan Foreign Currency Loss — — 173
(Gain) Loss on Investments and Other Assets, Net (131) 31 (493)
Equity in Losses of Investee Companies, Net of Cash Distributions 324 161 232
Equity-Based Compensation 277 182 219
Deferred Income Taxes 236 328 166
Premiums Paid and Costs Incurred on Debt Redemption 1,008 72 —
Changes in Operating Assets and Liabilities, Net of Acquisitions:
Receivables (1,20 (112) (403)
Inventories and Film Costs (8,77 (8,52 (7,78
Accounts Payable and Other Liabilities 631 (200) 592
Other Changes (637) (616) (1,75
Cash Provided by Operations from Continuing Operations 4,683 3,851 3,681
INVESTING ACTIVITIES
Investments in Available-for-Sale Securities (9) (41) (30)
Investments and Acquisitions, Net of Cash Acquired (1,22 (672) (950)
Capital Expenditures (432) (423) (474)
Proceeds from Time Inc. in the Time Separation — — 1,400
Proceeds from the Sale of Time Warner Center — — 1,264
Other Investment Proceeds 309 143 173
Cash Provided (Used) by Investing from Continuing Operations (1,36 (993) 1,383
FINANCING ACTIVITIES
Borrowings 3,830 3,768 2,409
Debt Repayments (3,30 (2,34 (72)
Proceeds from Exercise of Stock Options 172 165 338
Excess Tax Benefit from Equity Instruments 88 151 179
Principal Payments on Capital Leases (14) (11) (11)
Repurchases of Common Stock (2,32 (3,63 (5,50
Dividends Paid (1,26 (1,15 (1,10
Other Financing Activities (1,10 (260) (173)
Cash Used by Financing Activities from Continuing Operations (3,92 (3,31 (3,94
Cash Provided (Used) by Continuing Operations (599) (455) 1,121
Cash Used by Discontinued Operations (17) (8) (190)
Effect of Venezuelan Exchange Rate Changes on Cash — — (129)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (616) (463) 802
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 2,155 2,618 1,816
CASH AND EQUIVALENTS AT END OF PERIOD $1,53 $2,15 $2,61
Source: Excerpted from Time Warner Inc., 2016 Annual Report, 63, 2017, accessed February 8, 2019,
http://annualreports.com/HostedData/AnnualReportArchive/t/NYSE_TWX_2016.pdf.

This document is authorized for use only by James Vardilos in 2022.

 For the exclusive use of J. Vardilos, 2022.

Page 11 9B19N022

EXHIBIT 6: COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS (IN US$)

EBITDA
Date Acquirer Company Target Company Deal Value
Multiple
June 2016 Lions Gate Entertainment Corp. Starz Inc. $4.40 billion 10.9×
April 2016 Comcast Corporation DreamWorks Animation SKG Inc. $3.80 billion 32.3×
Yankee Entertainment and Sports
November 2012 News Corporation $3.90 billion 12.2×
Network
August 2009 The Walt Disney Company Marvel Entertainment Group Inc. $4.24 billion 12.7×

Note: Note: EBITDA = earnings before interest, taxes, depreciation, and amortization
Source: Created by the case authors using data from Bloomberg.

EXHIBIT 7: MULTIPLES OF MAJOR COMPETITORS IN THE MEDIA INDUSTRY

P/E Ratio EV/EBITDA

Entertainment Division (Warner Brothers)
The Walt Disney Company 16.23 9.51
21st Century Fox Inc. 15.93 9.01
CBS Corporation 15.29 10.97
Channels and Network division (Turner and HBO)
AMC Networks Inc. 12.54 5.93
Discovery Communications Inc. 13.64 8.75
Scripps Networks Interactive Inc. 10.57 4.74

Note: P/E = price-to-earnings; EV/EBITDA = enterprise value–to–earnings before interest, taxes, depreciation, and
amortization
Source: Created by the case authors using data from D&B Hoovers database.

EXHIBIT 8: DISCOUNTED CASH FLOW MODEL INPUTS FOR TIME WARNER

WACC Inputs Description

Weight of Debt 21.00% = 23.3 ÷ (23.3 + 85.4)
Weight of Equity 79.00% = 100% − Weight of Debt
Cost of Debt 3.50% Most Recent Bank Loan Interest Rate
Risk-Free Rate 2.31% Long-Term Governance Bond Yield
Beta 1.9 From Bloomberg
Market Risk Premium 5.00% Common Practice for North America
Tax Rate 35.00% Marginal Tax Rate

Free Cash Flow (2016) Inputs (in US$ millions)

EBIT 6,583
Depreciation and Amortization 669
Capital Expenditure 432
Working Capital 2016 3,782
Working Capital 2015 4,511

Notes: WACC = weighted average cost of capital; EBIT = earnings before interest and taxes.
Source: Created by the case authors.

This document is authorized for use only by James Vardilos in 2022.