AT&T got what it wanted when a federal court Tuesday officially OK’d its $85 billion merger with Time Warner. Now what comes next for AT&T?
In all likelihood, AT&T and Time Warner don’t have to worry about fending off an appeal from the U.S. Justice Department. DOJ antitrust official Makan Delrahim said his agency will consider “next steps” but Judge Richard Leon was explicit in warning the DOJ against requesting a stay or otherwise trying to delay the merger, saying such an action would be “manifestly unjust.”
BTIG analyst Rich Greenfield said an appeal at this point would be difficult for the DOJ.
“The reality is that the judge wrote a very clean opinion which is exactly what he hoped he’d do. It really makes an appeal very difficult for the government and most likely the AT&T-Time Warner transaction is going to close early next week,” Greenfield told Cheddar.
In the meantime, Moody’s still have AT&T Baa1 rating under review as it waits to see how or if the government responds to the decision.
“There are several scenarios that would allow for a conclusion of the review. Given the current termination date of the merger agreement of June 21, 2018, a stay of the ruling could cause Time Warner to forego extending the agreement and seek other suitors instead, allowing for conclusion. If Time Warner agreed to extend the termination date under a stay, the review would continue. If the ruling is not stayed, the merger would clearly be consummated and the review would be concluded. In a scenario in which the Government appeals but does not secure a stay of the ruling, we would expect the merger to be consummated and our review completed,” Moody’s wrote in a research note.
AT&T said immediately follow the ruling that it plans to close the transaction on or before June 20. Jefferies analyst John Janedis said several hurdles remain for AT&T even after consummating the deal, and those factors could cause market fluctuations.
“On the one hand, the ruling removes the M&A overhang, brings mid-single digit deal accretion, and better positions AT&T to compete LT. However, we remain on the sidelines as we believe: 1) T may need to accelerate investment in Time Warner (TWX, Hold) content; 2) advertising benefits/opportunities may take longer to materialize; and 3) risks to standalone EPS guidance remain,” Janedis wrote in a research note.
UBS analyst John Hodulik said the deal could accretive to EPS but that the long-term effect will depend on AT&T’s ability to leverage Time Warner’s content and accelerate the advanced advertising business.
“With ongoing secular shifts in media/video, AT&T’s ability to execute while sustaining operating momentum at TWX will be the primary focus,” Hodulik wrote in a research note.
MoffettNathanson analyst Michael Nathanson also warned about the massive $249 billion in debt AT&T is taking on in the wake of the deal.
“If pro forma AT&T were a country, it would place 32nd on the list of highest total debt burdens, between Indonesia and the UAE,” Nathanson wrote in a research note. “Pro forma leverage, on an adjusted basis, will now be 3.9x EBITDA.”
Nathanson also cautioned that AT&T’s EBITDA is shrinking thanks to declines in revenues for its video distribution business.
Outside of AT&T’s orbit, the shockwaves of the court’s decision on the merger are expected to set off a media industry M&A frenzy, which will likely materialize soon in a rival bid from Comcast for Fox’s studio and cable network assets, which Disney is buying for $52.4 billion.
Barclays analyst Kannan Venkateshwar noted how Leon’s decision mentioned how much the video programming and distribution industry has changed in just the past 18 months since the AT&T-Time Warner merger was announced.
“Therefore, the ruling is likely to be a near-term negative catalyst for companies looking to acquire assets as bidding wars are becoming more probable due to the scarcity of assets. On the other hand, potential targets could see a run up near term,” Venkateshwar wrote in a research note.