The latest news that has taken Wall Street by storm is the biggest deal of the year, creating possibly the biggest media conglomerate the world is about to see: AT&T’s planned buyout of Time Warner for $85.4 billion. AT&T Inc.’s blockbuster $85.4 billion deal to buy Time Warner Inc. promises to reshape the media landscape—if the companies can navigate a series of obstacles, including possible opposition from U.S. antitrust authorities and objections by lawmakers and media and telecom rivals. AT&T is currently the world’s third largest cable provider and by taking control of Time Warner, it will also have power and control over channels like TNT, CNN, and HBO which are major trending and revenue providing channels for Time Warner. The entire mind-boggling list of assets owned by TimeWarner can be viewed here.
As soon as the deal was announced Saturday night (22 Oct), there were a lot of controversial statements that came from concerned politicians and even the Presidential candidates. Donald Trump said if elected he wouldn’t approve the deal “because it’s too much concentration of power in the hands of too few.” Former presidential candidate Bernie Sanders on Sunday called on the administration to block the merger. “This deal would mean higher prices and fewer choices for the American people,” Mr. Sanders wrote on Twitter. Democratic Presidential nominee Tim Kaine had the same thoughts but wasn’t sure about the result as he said, “Pro-competition and less concentration, I think, is generally helpful, especially in the media.”
Disney, being the biggest competitor quickly chimed in, urging regulators to pay close attention in their review. Amidst all the criticism and comments made by individuals, AT&T was quick to reply and played down criticism from politicians, competitors, lawmakers and industry groups as they said that a merger between service provider and distributor isn’t a kind of deal regulators take issue with. “It is going to have to go through a regulatory review process that is dictated by rules, regulations and laws,” Mr. Stephenson said in an interview. “I can’t control what the politicians say and feel about it.”
The major concern here is how power will be vested in the hands of AT&T if the deal does go through, and if AT&T will favor its own users over the rest. Another issue is if AT&T will withhold Game of Thrones from other cable providers and make a monopoly out of it, because 18% of the revenue of HBO is generated by the show alone.
AT&T is one medium through which millions of people consume their means of entertainment. It owns the platform – be that cable or broadband – which enables people to watch their favorite shows, but till date it doesn’t own the content which people want to watch, may it be their favorite TV series or sports channel, but buying out TimeWarner can take AT&T’s game to a next level. It will make AT&T become a full-service media provider and one of the more important companies in the world. With this acquisition, AT&T can march way ahead of their broadband competitors Verizon and Comcast whom they already outspent in lobbying.
AT&T’s Debt Structure
This deal gives us a clear idea of what AT&T is thinking about with regards to its expansion in the near future. It has made a clear statement that it’s looking to expand at a lighting fast pace and wants to leave behind it’s competitors by buying DirecTV last year for $48.5 billion and showing intent in buying Time Warner for around $85 billion. If AT&T completes its colossal acquisition of Time Warner, the combined company will in some ways look more like a bank than a media conglomerate.
The New York times reported, “The balance sheet of the merged company would have so much debt on it — about $175 billion — that it would exacerbate its position as the largest non-bank corporate issuer, and make it bigger than some financial institutions.” AT&T plans on taking $40 billion worth more of debt with about $45 billion coming out of their own pockets if this deal were to take place. This debt would be over the other $48.5 billion they had borrowed during the acquisition of DirecTV. With interest rates near zero, corporations have benefited in recent years by being able to raise debt at inexpensive levels to fund acquisitions. Currently, the company will need to refinance about $9 billion a year, Moody’s estimates.
So the question that would arise is: Can AT&T manage this debt load? The company has one of the best investment grade ratings and is perceived to be among the healthiest companies, with a smaller probability of default. AT&T has said that once the companies are integrated, they will be able to bring down the ratio of net debt to 2.5 times the combined entity’s adjusted EBITDA, at the end of the first year after closing.
There are a lot of aspects to look at when we look at this conglomerate. Not only will this change the prices of AT&T and Time Warner, but it will have a drastic impact on Comcast, Verizon, Disney and various other competitors who lie out there for AT&T. With the announcement itself, trading resumed with shares of AT&T up by 12% and stock price of AT&T is nearly down by 4%. Shares of TimeWarner surged by 14% pushing the company’s worth to $70 billion, reported Bloomberg. AT&T is still on the backfoot thinking that there will be bids from various other companies such as Google, FOX or Apple.
The bigger question that comes now is what will happen to companies like Disney, Comcast, and Verizon? If the deal goes through, all of these companies can see a major fall in their prices. With AT&T being the number 1 TV distributor and TimeWarner being the number 2 wireless provider, other competitors could lose 5-7% of their customer base unless they come up with plans that are more satisfying for their customers. Prices notwithstanding, and with Time Warner having few of the monopolistic channels out there, AT&T could make this a monopoly market soon if their competitors soon figure out methods of beating this.
The first thing to note from this deal would be the situation of the market. While there are various speculations of the market not being up to mark in terms of benefiting U.S. consumers and savings and lending being expensive, major companies seem to be still successfully running their business. Secondly, while AT&T might drive business from its competitors into their hands, it will also gain the power to provide what people like back to them at a higher cost and with lesser choices left in the market to turn to. But, will the deal happen? As mentioned before, many have deemed this as anti-competitive as AT&T owns various platforms and consumer choices will be deprived, but with a new Government being formed and there still being questions on the regulation of various policies of this deal, only time can tell what lies ahead.
Disclaimer: The article is written by Yash Shah and expresses the writer’s own opinions.