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AT&T Promptly Closes Time Warner Acquisition

By Evan Niu, CFA - Jun 15, 2018 at 2:22PM

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That was fast.

Just days after a federal court ruled in favor of AT&T (T 0.58%) in its contentious legal battle with the Department of Justice over its acquisition of Time Warner (TWX), Ma Bell has announced that it sealed the deal. In doing so, AT&T will become comparable to some of its telecom giant peers that have similarly been making media-oriented blockbuster megamergers in recent years, bringing valuable properties like HBO, Turner Networks, and Warner Bros. under its corporate umbrella.

Regulators had said they would not attempt to delay the deal from closing following the judge's decision this week, although technically the DOJ has about two months to still appeal the decision.

AT&T headquarters

Image source: AT&T.

The final countdown

Throughout the trial, there was a deadline for the merger looming over the proceedings. The companies had agreed to extend the timeline in order to accommodate the DOJ's suit, which was filed in November. Initially, the deal needed to close by April 22, otherwise either company could back out. Both companies agreed in December to extend that deadline to June 21 -- next Thursday.

So it's no surprise that AT&T moved swiftly in the wake of the favorable court decision to close the acquisition. If the deadline passed and the deal was not closed, AT&T could have been on the hook for a $500 million breakup fee. That fee is actually relatively small when considering the scope of the deal itself, valued at nearly $110 billion when including Time Warner's debt.

The finalized details

The initial offer consisted of $53.75 per share in cash in addition to $53.75 per share in stock, but there was a collar on the stock component to hedge against market fluctuations. If AT&T's average stock price was less than $37.411 at the time of closing, Time Warner shareholders would receive 1.437 shares of AT&T for every Time Warner share held. If AT&T's average stock price was greater than $41.349 at closing, Time Warner shareholders would receive 1.3 shares of AT&T. The former scenario is what occurred.

AT&T has now issued nearly 1.2 billion shares for the deal and cut a check for $42.5 billion in cash to cover the rest, which includes buying Time Warner's debt. The combined company now has $180.4 billion in net debt, according to AT&T, which will start consolidating Time Warner's financial results effective immediately.

The company is also boosting its expectations of the deal, saying it now estimates total synergies to be around $2.5 billion. The annualized cost synergies are now estimated at $1.5 billion, up from AT&T's initial estimate of $1 billion, and the company is also adding revenue synergies to the mix that it estimates will be worth $1 billion on an annual basis.

Revenue synergies are essentially cross-sells, where a combined company expects to be able to generate more sales than if the companies were independent. There should be little doubt that AT&T will try to bundle content services like HBO Now together with wireless data plans, much like it currently offers with DIRECTV Now.

Despite the massive debt load, AT&T says its balance sheet will remain strong, which is of utmost importance to income investors that rely on AT&T's dividend payouts. After closing the deal, AT&T says its net debt is a manageable 2.9 times adjusted EBITDA.

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AT&T Inc. Stock Quote
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