Yesterday we asked if, coming at a time when AT&T’s organic results posted a mild disappointment, the latest megamerger involving Time Warner is a sign of the top.
As Dow Jones remarked in similar fashion today, “more than 15 years after it was part of one historic merger, Time Warner is getting bought again, and while AT&T Inc.’s $85 billion bid for the media company is not quite on a par with AOL’s historic $164 billion acquisition of Time Warner in 2000 (later revealed to be a historic blunder), it’s still a big enough deal that it’s drawing attention on the campaign trail from both candidates.”
To be sure, the deal – if it passes – will be the latest case study on how to merge content and distibution at a time when a fresh wave of new technologies is putting pressure on old-line businesses.
On the media side, consumers have more options than ever. Outfits like Amazon and Netflix are producing their own original programming, and doing it well. Hey, even Yahoo was making shows for a while. On the distribution side, AT&T gets “content” for new mobile platforms, which it will need to capitalize on, because the wireless business is cutthroat, capital intensive, and saturated already.
But while 16 years ago analysts were blindly optimistic, that is no longer the case. As summarized by the WSJ, here is Wall Street’s less than upbeat take on the biggest media merger in years:
- Anthony DiClemente, Nomura: We are as yet unclear on the strategic value AT&T sees in TWX; content/distribution marriages have been inconclusive. We are clear, however, the deal adds execution risk, reverses debt progress and pressures vendors…In TWX, AT&T would gain access to a plethora of high-quality media content, to be distributed in presumably new ways across AT&T’s mobile video platform, including the soon-to-be-launched DTV Now. We also think the acquisition may represent a positive lateral read on the broader value of media assets; however, we really do not anticipate a wave of Media M&A activity triggered here, given the lack of clearly visible content/distribution synergies and given closely held ownership structures.
- Frank Louthan, Raymond James: The main benefits to AT&T are 1) diversification into better growth businesses with far less capital intensity, and 2) the ability to utilize its customer base to improve Time Warner content utilization. We believe carrier data on broad usage and content is valuable to content creators that will pay to access it, and Time Warner will benefit from this data for their programming, driving higher content and advertising growth. We continue to rate shares of AT&T outperform as we believe the transaction has a longer-term diversification and de-risking benefit for AT&T shareholders. While we would have preferred the full benefit of the DIRECTV merger to not require content ownership, we believe this deal is only mildly dilutive up front and likely to improve for shareholders over time. We also note, the deal is unlikely to impact 2017 results.
- Walter Piecyk, BTIG: AT&T faces a tough 2017. While competition is generally tame within the wireless industry, many believe the dominant operators are about to enter a prolonged phase of share donation to Sprint and T-Mobile. In fact, this week Verizon announced its first ever Q3 post-paid phone subscriber loss, while Sprint reported 347,000 post-paid phone additions. It will also be harder for AT&T to grow reported EBITDA and EPS now that the positive accounting impact of phone payment plans has largely run its course…There is no indication that Verizon will be baited into a large media transaction, opting instead to build and cobble together smaller media acquisitions and attempt to reduce its debt leverage since the $130 billion acquisition of Vodafone’s stake in Verizon Wireless…Without a clear interest in a large media transaction, we believe Verizon should be focused on protecting its 60% margin wireless business, which faces new threats based on the shrinking benefits of its wireless network advantage and apparent inability to offer higher data capacity rate plans at competitive prices.
- James Cakmak, Monness Crespi Hardt: This deal makes a ton of sense on paper for both parties, but only on paper. We prefer mergers between media assets…In our opinion, this is more of a reactive move than a proactive one. We see it as trying to stop the bleeding in a very expensive way, and one, at least by looking at the synergies afforded between Comcast and NBCUniversal, do not create a situation where the sum of the parts is greater than the whole. It’s hard not to be reminded of Time Warner and AOL deal back in 2000…First off, we believe there would be too many limitations on incorporating a competitive edge versus peers, including the ability to offer a zero rating on first-party content streaming (free data caps), the necessity to maintain content distribution relationships with rivals, and likely minimal room to exercise pricing power for consumer discounts. Second, operational cost synergies are few and far between. And third, it does little to solve the issues associated with engagement and the attention shifts to aggregating platforms like Facebook, and even more so, Snapchat.
- Benjamin Mogil, Stifel: From an industrial logic perspective we see the deal as focusing on the HBO and Warner Bros. assets both in terms of their value for content generation and the value in the ecosystem for premium non-ad supported channels. While the Turner assets make up more than half of [adjusted operating income], we believe that their share in the ultimate value ascribed to the company was well below their AOI share. That said, there remains considerable value for certain cable channel genres notably news (CNN) and enough sports to be must carry but not enough to burden the entity with high fixed costs (TBS/TNT). This is offset by the heavy exposure at Turner to scripted (TNT/TBS) and kids (Cartoon Network) with both genres continuing to be at risk by [streaming video on demand].
However, for AT&T to succeed where AOL infamously failed in 2000 may not be the biggest hurdle. The biggest difficulty may be getting regulatory approval for the deal to close in the first place. As Reuters notes overnight, AT&T’s proposed $85 billion takeover of Time Warner Inc generated skepticism among both Democrats and Republicans on Sunday, making it more likely that regulators will closely scrutinize the effort to create a new telecommunications and media giant.
The biggest deal of the year, announced just over two weeks before the Nov. 8 U.S. election, is a gamble on a victory for Democratic presidential candidate Hillary Clinton and a continuation of the status quo on anti-trust and regulatory enforcement. The Republican candidate Donald Trump, who is trailing Clinton in the polls, has said he would block the takeover.
“AT&T, the original and abusive ‘Ma Bell’ telephone monopoly, is now trying to buy Time Warner and thus the wildly anti-Trump CNN. Donald Trump would never approve such a deal because it concentrates too much power in the hands of the too and powerful few,” Trump economic advisor Peter Navarro said in a statement on Sunday.
Clinton, who has expressed misgivings about other corporate mega mergers, has not yet commented on the takeover. A spokesman Brian Fallon told reporters on Sunday there were “a number of questions and concerns” about the deal “but there’s still a lot of information that needs to come out before any conclusions should be reached.” The Senate subcommittee on antitrust will hold a hearing on the acquisition sometime in November, said subcommittee chair Senator Mike Lee, a Republican, and the ranking Democrat, Senator Amy Klobuchar.
Tim Kaine, Clinton’s running mate and a senator from Virginia, said lawmakers and regulators would have to review the deal and “get to the bottom” of questions over whether the merger would decrease competition. “I’m pro-competition,” Kaine said on NBC’s “Meet the Press.” “Less concentration, I think, is generally helpful especially in the media.”
Kaine said he had not had a chance to review the details of the deal. The U.S. Justice Department, not the president, has the power to reject such a deal if it violates antitrust laws. AT&T said it is unclear if the Federal Communications Commission will also have jurisdiction to review the deal.
Case in point, just moments ago, the following headlines hit:
- SEN. AL FRANKEN RELEASES LETTER TO FCC/DOJ ON AT&T, TIME WARNER
- SEN. FRANKEN QUESTIONS PROPOSED AT&T, TIME WARNER MERGER
- FRANKEN ASKS FCC, ATTORNEY GENERAL TO SCRUTINIZE MERGER PLAN
The one place where Wall Street skepticism is most obvious is in Time Warner’s stock price: at last check TWX was trading at $87.30, nearly 20% below AT&T’s $107.50 bid.
However, while both Time Warner and AT&T are aware of the inherent risks in the transaction, the biggest losers may be Wall Street banks, which have pledged some $40 billion in loans to make the deal a reality. As Bloomberg explains, “JPMorgan Chase has pledged $25 billion of the financing, with Bank of America Corp. providing the rest, according to a regulatory filing. That’s believed to be the most JPMorgan has ever promised for a deal, according to a person with knowledge of the matter who asked not to be identified without authorization to speak publicly.
The lending commitment alone would bring about $110 million to $130 million in fees for JPMorgan and Bank of America, according to estimates from consulting firm Freeman & Co. It also gives the banks an advantage on bond offerings that would find eager buyers among yield-starved investors. At the same time, the banks face the risk that the deal, along with a chunk of their balance sheets, would be tied up if regulators delay approving it.
“This could be an especially lucrative deal for the banking industry; they’re going to make a lot of money if the deal gets done” said Bert Ely, a banking consultant at Ely & Co. “The numbers on the credit piece look big, but I’m sure the credit risk will be spread widely. The big uncertainty hanging over this will be the battle for regulatory approval and what lender protections are included if the deal fails.”
A failed megadeal wouldn’t be the first for AT&T. In 2011, the company abandoned its takeover of T-Mobile USA because of regulatory hurdles. JPMorgan had lined up $20 billion to finance that deal. And as the chart below shows, the deal would be the fith largest M&A debt financing sold by Wall Street in history.
Coming a time of yield-starved investors from around the globe seeking to put money into anything with no regard for fundamentals, it is unlikely that the debt financing will have any difficulty finding willing homes. However should rates rise over the coming months as many predict n the not too distant future, potentially roiling the fixed income industry, and at a time when the deal is kicked back and forth between regulators and politicians, it just may lead to more than Wall Street can chew.
via http://ift.tt/2ehrn6q Tyler Durden