AT&T and Time Warner Merger

By Malcolm Berko

October 26, 2016 5 min read

Dear Mr. Berko: AT&T is my largest position. I started buying the stock at $24 in the summer of 2009. I own 6,783 shares, and my dividends are reinvested as you recommended. I'm hearing bad things about the buyout of Time Warner. For example, I hear that the debt is too high and that stock dilution will limit earnings and dividend growth. Others say that Time Warner and AT&T combined will be stronger and that revenues, earnings and dividends will grow faster than they have in the past. My stockbroker is very negative on the merger and wants me to sell all my AT&T shares and buy Verizon. He is recommending that all his clients who own AT&T sell their shares. He is telling them and me that the buyout costs will weaken the balance sheet and income statement and that many mutual funds will have to sell hundreds of millions of shares, dropping the price back to the $25 level.

At 72, I'm very nervous about this, and I beg you for your advice. Please tell me whether I should hold AT&T or sell it and buy Verizon. Please answer as fast as you can. — CL, Moline, Ill.

Dear CL: Early last August, AT&T's (T-$36.90) CEO, Randy Stephenson, decided to stop by the offices of Time Warner's (TWX-88) CEO, Jeff Bewkes, in New York. While Jeff's chef served an epicurean lunch of salmon, caviar and Champagne, a deal was born; these two industry titans were planning to conquer the broadcast media universe. After lunch, Randy left the TWX offices with visions of sugarplums that included TBS, TNT, Cartoon Network, HBO, CNN, Warner Bros. and the growing DC cinematic universe, as well as the Harry Potter franchise and other delicious media properties that could make T a serious rival for Disney (DIS-$93).

The combination of T and TWX creates a group of assets with some of the highest sales, earnings and free cash flow numbers in the world. The new company would have combined revenues of about $191 billion, combined earnings of $18.4 billion and a free cash flow of $20.2 billion. This $85.4 billion deal (cash and stock to buy TWX at $107.50 a share) would create a conglomerate that produces content and then distributes this content, uniting the millions of AT&T's pay-TV and wireless customers with TWX's huge cache of media content. It's a no-brainer — maybe!

I've gone a bit bonkers attempting to figure out how the financing of this mega-deal might work. I've played with several trial balance sheets and income statements using various amounts in AT&T shares and sums of cash. I related the numbers to revenues and interest costs and even included some $2 billion in annual synergy savings, and my conclusions are impressively positive. However, I am not confident with my numbers and feel I'm missing data. Certainly, the combination of T with TWX could have explosively exciting potential. But the large amount of shareholder dilution (and I don't know how much just yet) necessary to acquire TWX could hurt free cash flow, which is what secures T's dividend and its growth. Several analysts who have applied their data and assumptions to this buyout and have posited balance sheets and income statements have produced results ranging from quietly negative to extremely positive.

Still, I can't answer the question with the comfortable certainty you need. So I suggest that we recognize that both CEOs are really smart guys and have staff working for them who are also RSGs. And the boards of AT&T and Time Warner have RSGs with enviable national reputations who are now publicly tasked to make this work. I trust these people. The biggest problem is Congress and a harridan named Sen. Lizzy Warren. Lizzy (rhymes with dizzy) may direct bureaucratic roadblocks to scuttle the deal, claiming the merger would concentrate too much power in the hands of too few. Today's consensus is that Congress won't allow the merger. So stay the course, continuing to earn a 5.2 percent dividend, and T's price will rise. If the deal succeeds, trust the professionals who put it together for shareholders' best interest. And I like Verizon (VZ-$48).

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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