Back in late 2008, an old Wall Street saying got discovered by the mainstream press, right after the collapse of the mortgage-backed securities market cratered several large investment banks and nearly took the global economy with it: “Only when the tide goes out do you discover who’s swimming naked.”
Of course, Comcast and AT&T certainly don’t appear to be investing in secret Ponzi schemes or impossibly arcane derivative-based financial products. But I could see why an investor on a fixed income might bail on these two companies right now. They’re getting themselves into some pretty deep water.
After closing on Time Warner Inc., AT&T is leveraged to the tune of nearly $250 billion, ranking it as the most indebted company in the world. And with AT&T reportedly eyeing additional purchases of ad tech firm AppNexus and the rest of Otter Media for $1.6 billion, who knows where that finally stops.
If Comcast and its chairman and CEO, Brian Roberts, have the will to keep ignoring their investors, and actually succeed in usurping Disney’s $71 billion bid for the bulk of 21st Century Fox assets, they’ll walk away with debt as high—or higher—than $170 billion.
There’s probably a few assets they can offload along the way. “I'd start with assets it may need to sell to get regulatory approval,” said UBS analyst John Hodulik in an email to Fierce. “For me, the biggest issues would be the RSNs and Hulu. I think either would generate more than $10B in proceeds.”
Still, with the final price for the Fox assets still unknown amid a bidding war with Disney, no matter what Comcast could offload at a garage sale, it would walk away with huge debt.
These are not fancy Silicon Valley startups with explosive Wall Street market caps and businesses with untapped potential (although, I think people would still freak out if Facebook ran up this kind of credit card bill). These are mature, growth-challenged telecom companies.
"It's an unprecedented amount of debt for a company like Comcast," Cowen analyst Gregory Williams said.
With the two mergers, Comcast’s debt-to-income ratio would rise from 2.5 times its annual profit to 4.25 times.
In Comcast’s June 13 conference call to announce its $65 billion bid for Fox, the cable conglomerate conceded that the debt load would indeed be high, but paying it down would be its top priority … and it had a plan.
“We expect to maintain our solid investment grade ratings post closing and are committed to returning to the area consistent with our current rating within a reasonable period of time,” Comcast CFO Michael Cavanagh said. “We'll get there by reducing net leverage by about 0.5 turn per year which the significant free cash flow generation of the combined company enables us to do. We continue to expect to repurchase at least $5 billion of stock in 2018. And beyond that, we'll make capital return decisions on an annual basis, as usual. I will say our primary focus in the years following the transaction will be to deliver the balance sheet.”
As Mike Tyson would say, everybody has a plan until they get hit in the face by a global recession. With the economy experiencing nearly a decade of expansion, the consensus among economists is that we’re probably due for one.
And let's not get started with political turmoil. OK, we’ll get started a little bit. I’ll just mention the one thing we can all agree with—we’re also in uncharted waters there.
We can all probably agree that it’s the first time in our adult lives that a U.S. President threw Starburst candies at another world leader, or announced that the media—a lot of which AT&T just bought—is the “enemy of the American people.” Agree or disagree with this radical new vision of American politics, does this all go to a stable place where an American corporation can safely pay down $200 billion to $300 billion over time?
With Netflix’s market cap up another $25 billion over the last month—it’s now at more than $180 billion—AT&T and Comcast are desperate to quickly obtain scale in the global media business and compete in OTT. It would have been better if they had realized the OTT threat earlier and made organic investments in original content and global expansion—like Netflix!—but hindsight is always 20/20.
Lets just hope they’ve got their bathing suits on when the tide rolls out.