AT&T’s acquisition of Time Warner will help increase its dividends but that will come at the cost of a debt load which will make the nation’s second largest carrier one of the most indebted companies.
The deal currently values Time Warner at $85.4 billion which will be paid half in cash and half in stock. AT&T intends to finance the $40 billion cash part in new debt through bridge loans. The deal’s value is nudged up to $108.7 billion when Time Warner’s debt is taken into consideration.
In addition to this, the company’s total debt for the third quarter of this year is $125.221 billion, roughly double the amount five years ago.
A part of the increase can be attributed to the company’s purchase of DirecTV for $48.5 billion last year, a move criticized by many industry experts. For the acquisition, the carrier sold $17.5 billion in bonds, in what was then the third largest corporate bond sale ever.
Aside from increasing AT&T’s already burgeoning debt, both DirectTV and Time Warner deals are meant to add to the carrier’s income.
Buying DirecTV was accretive to both earnings per share and free cash flow, and the same is expected out of the Time Warner deal, according to Ben Thompson, the founder of Stratechery.
This additional revenue for cash will help maintain the company’s standing as a 32 year member of the Dividend Aristocrats — S&P500 companies that have increased their dividend for 25 straight years or more, he said.
AT&T has still not declared how much debt it will issue, but said in its recent earning call that it intends to reduce its leverage within four years. That being said, it is one of the largest corporate issuer of debt.
The debt load also means that the telecommunication conglomerate’s bond ratings are likely to slip. AT&T’s current ratings are three levels above junk according to Moody’s and S&P. Last Monday, Moody’s released a statement that the company’s bonds are under review for a downgrade but said that this would be limited to one notch down. This may make it seem innocuous, but it may adversely affect the company’s borrowing costs.
“AT&T’s common dividend will grow to around $14.5 billion annually from around $12 billion prior,” Mark Stodden, the vice president of Moody’s said in prepared statements. “This large, after-tax cash obligation reduces AT&T’s financial flexibility and limits its ability to repay debt.”
In addition to this, the Federal Reserve’s decision is looming around the corner. If the Fed chooses to raise interest rates this December, it will make the cost of borrowing more expensive. With its bridge loan financed by Bank of America and J.P. Morgan Chase, AT&T will have to pay a hefty bill and this may not bode well for the company.
“A change in the environment could make this already dicey-looking deal a downright bad one,” analysts from Bloomberg said in a report.
Despite skepticism, regulatory hurdles in the near future and the massive debt load, AT&T is still hedging its bet on this deal. Other than its hunger for content to push through its pipes, the carrier’s latest SEC filing says that it expects the deal to help push current cable companies into what it obviously sees as the future— mobile. It also said that it hopes to give customers a wireless alternative to the cable internet that they have, something that they see a high demand for.
Some analysts, like Jim Nail of Forrester, seem to be optimistic about this outlook.
“They may have paid too much for this deal,” Nail told Investment Journal. “But because of the combination of distribution and content, they may be able to find a way to leverage revenue.”