Both major presidential candidates have expressed concerns over the proposed acquisition of Time Warner (TWX +0.00%) by AT&T (T 1.52%). Donald Trump has said he won't allow it, and Hillary Clinton has said the deal should be looked at closely.
Those sentiments, coupled with recent regulatory decisions, suggests that this deal will be reviewed over many months. That may result in some uncertainty for shareholders going forward.
In this clip from Industry Focus: Consumer Goods, Vincent Shen and Daniel Kline discuss what shareholders get out of the deal. They also cover the buyout premium, rising debt levels at AT&T, and other obstacles in a successful integration of the two companies.
A full transcript follows the video.
This podcast was recorded on Oct. 25, 2016.
Vincent Shen: Stepping back from the Comcast example, in general, right now, there have been a huge slew of big M&A announcements in 2015 and 2016 -- some successful, some not successful. But I think overall, people would agree, in terms of the Justice Department and the FTC, they are very closely scrutinizing these big deals. Just think about the tie-up with Walgreens and Rite Aid, Bayer and Monsanto, Dow and DuPont, Anheuser-Busch and SABMiller -- these all required a minimum of one-year review periods, if not more, and are currently in the process for a lot of those. Comcast and Time Warner deal, scuttled. Staples and Office Depot did not come out. Halliburton and Baker Hughes, Pfizer and Allergan. All these examples are of deals that did not make it through. As the climate, like you mentioned, two major presidential candidates can't agree to anything, but both of them are like, "You know what? This might not be the best idea."
Dan Kline: Yeah. The current climate says this deal does not get approved. But the reality is, not that long from now, a few weeks from now, we're going to have a new president and we might see control of Congress switch hands. So the climate that we're operating in isn't necessarily the climate we're going to have going forward. There's a lot of reasons to say no to this deal, but we don't see a monopoly. They don't knock out a clear competitor. Consumers would still have the ability to go get a Verizon phone or, in most markets, get a different cable company, or subscribe to Showtime instead of HBO, or Netflix. So this isn't eliminating competition directly, but it does give them a huge wedge to eliminate competition. I mean, if I was [DISH Network], I would not want this deal, because when you're making a deal for Sling TV, which has HBO, oh, boy, the terms might get very different when DirecTV is marketing against you.
Shen: Yeah, absolutely. I want to end the show, for any investors and shareholders out there invested in those two companies, with specifics for the deal for Time Warner. Total deal size: about $85 billion. Time Warner shareholders, in terms of the consideration they will receive based on the current deal parameters, they would receive part cash -- $53.75 per share in cash -- and then $53.75 in AT&T stock. So, total consideration, about $107.50 per share. Special conditions, though, lie therein that the stock portion of consideration has a collar -- basically meaning, when the deal closes, if AT&T shares are trading below about $37.41, approximately, you would get 1.437 AT&T shares, and if it's trading above about $41.35 at closing, then you'll only get 1.3 shares. So a small consideration there. And overall, for the combined entity itself, Time Warner shareholders will hold about a 15% stake of that final company.
On the AT&T side, I think, they just completed a $50 billion deal for DirecTV last year. You mentioned the debt balance.
Kline: The debt terrifies me on this. You're going to have to -- they say they're going to cut about $1 billion in expenses. What's $1 billion when you have $200 billion? So they'll catch up to their debt in 200 years? I mean, it's not a good number.
Shen: Yeah. So, to give you an idea there, AT&T right now, their cash balance is about $6 billion. Net debt is $120 billion. They would have to take on Time Warner's $22 billion of net debt. And then, the cash consideration for this deal alone is over $40 billion. So, Dan, that $200 billion number you threw out, throw it all together, you're getting pretty darn close --
Kline: I'm rounding up a little bit. But this is one of those deals where you have to assume everything is going to go right if you're a stockholder and you want to hold this long term. You have to assume that not only does AT&T buy this, but they can integrate properly, they can cost-cut without hurting quality, and they can leverage that to gain subscribers or advertising and more viewers. That's a lot of things that have to go right before you have kind of a debt crisis.
Shen: Final takeaway, for me personally, as it stands: I think, if the two companies come together in their total current forms, there are a ton of benefits. Personally, I might not agree with it. We've seen some issues with the acquiring company not living up to some of the promises that they make to get a deal through regulatory hurdles. I think there's a lot of problems with that, in terms of enforcement. But overall, if you are a shareholder here, in terms of the premium that you're getting, and also this mega-distribution, content-creation conglomerate that you get, I think it's a very powerful entity to have in the market. But whether the deal will go through -- like you mentioned, Time Warner being able to keep every piece of its business, the three major segments, between Turner, HBO, and Warner Brothers -- remains to be seen. And what concessions AT&T will have to do, what do you think?
Kline: I see the plus side for AT&T shareholders. They get premium content, which is very hard to come by. If I was a Time Warner shareholder, I don't think 35% is enough. I think spinning off HBO might be worth more than that, in terms of a premium. If you are a Time Warner shareholder who is a little bit dicey about the future of the company and are looking for an exit, this might be a wonderful strategy. But if you are a buy-and-hold investor who believes that HBO and TBS and TNT and CNN and all these properties had a future ... I don't know, I don't have a lot of faith in AT&T management. I know that Jeff Bewkes said he was going to stay on for at least a year, but content is not the same as subscriptions. You can't apply the same metrics. If you're HBO, TBS, TNT, you're going to have to lose money on a certain amount of prestige programming so HBO can keep saying "It's not TV, it's HBO." That's very hard for a traditional company to swallow. I've said it since the beginning -- it makes it a very uncomfortable marriage.
Shen: Absolutely. That's a very fair point. I think anyone who's trailing either company, or both, and just following this deal in general, we'll just have to see what happens with the regulatory hurdles and how things change as that part of the process develops.
