AT&T – Time Warner Deal: Reviewing The Benefits And Risks

by Trefis Team
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A Federal judge ruled on Tuesday that AT&T (NYSE:T) could proceed with its acquisition of media behemoth Time Warner, without any conditions, marking a significant win for the company as the deal was opposed by the U.S. Justice Department on antitrust grounds. AT&T expects the deal – which will integrate its vast distribution network, which spans wireless and broadband services and pay TV, with Time Warner’s media assets – to close by June 20. AT&T is counting on the media and content space to drive growth, as its core telecom business has slowed significantly. By acquiring Time Warner, AT&T would own high-quality original content, besides gaining some bargaining leverage in acquiring content from other companies for distribution, allowing it to keep content costs in check. However, the company still has a lot to prove, and investors also remain skeptical about the deal. For instance, AT&T stock declined by about 2.8% in after-hours trading on Tuesday, while Time Warner stock rose by roughly 4.5%.

We have created an interactive dashboard analysis which outlines our expectations for AT&T (standalone) over 2018. You can modify key drivers to arrive at your own forecasts for the company’s revenues and EPS. We will be updating our model for the company following the close of the TWX acquisition.

AT&T’s Mixed Track Record With Recent Deals 

With the deal, AT&T will effectively be transformed into one of the largest entertainment companies in the world. However, it remains to be seen as to whether it can deliver returns to shareholders, taking into account the rise of cord-cutting and cheaper Internet-based streaming options such as Netflix. Moreover, AT&T’s recent track record with acquisitions has been mixed. The company’s most recent deal – the acquisition of satellite TV provider DirecTV – doesn’t appear to have panned out the way the company projected. While AT&T has been able to reduce content costs via the deal, the satellite TV provider actually lost roughly 554k subscribers in 2017, running counter to the company’s post-merger plan of bolstering its satellite subscriber base.

The deal could also potentially put some financial strain on the company. AT&T’s total debt load stood at about $163 billion as of Q1 2018, as the company took on financing to fund the cash portion of the deal, and the figure could rise to over $185 billion after it assumes Time Warner’s debt following the close of the transaction. While AT&T has the wherewithal to service the debt (it is targeting a debt to EBITDA ratio of about 2.5x during the year post-closing), its expenditures are also expected to remain high in the near-term. Producing content is an expensive and increasingly competitive business, and the company’s capital requirements on the wireless side are also expected to accelerate, as it builds out its next-generation 5G wireless network. Moreover, unlike a horizontal merger, which results in significant cost savings, synergies are likely to be relatively limited in this case. AT&T previously indicated that it could see $1 billion in annual run rate cost synergies within three years of the deal closing, driven primarily by corporate and procurement expenditures.

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