Why Wall Street Is Split Over a Possible AT&T-Time Warner Merger
AT&T may be in the midst of negotiations to acquire Time Warner, but the rumored deal’s merits are already spurring a fierce debate on Wall Street.
On Friday, the Wall Street Journal reported that the telecom giant was in advanced talks to acquire Time Warner, which owns the Warner Bros film and television studio as well as popular cable channels such as CNN, TNT, and HBO. A deal could be completed as soon as this weekend, the paper noted, just a day after Bloomberg broke the initial story.
AT&T CEO Randall Stephenson has not been shy about making big bets to fuel future growth as the carrier’s two traditional markets—wired and wireless telephone service—have stagnated. Last year, AT&T paid almost $50 billion for satellite TV service DirecTV. Adding Time Warner could cost $85 billion or more, including taking on the company’s debt.
At the same time, Time Warner CEO Jeff Bewkes has appeared eager to sell his company. Last year, the company discussed a possible merger with Apple (AAPL), though nothing came of the talks. Time Warner’s most famous deal, of course, was paying $165 billion for AOL at the height of the Internet bubble.
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AT&T (T) declined to comment on the rumors. Time Warner (TWX) did not immediately respond to a request for comment.
Wall Street analysts appear split on the deal, and AT&T’s shares have dropped about 5% as rumors of the deal have grown louder the past few days. Shares of Time Warner, which rejected an $85-per-share bid from Rupert Murdoch in 2014, have climbed 15% to almost $92.
The logic behind AT&T acquiring Time Warner would likely be to counteract moves by Comcast, the cable giant that also owns NBC Universal, some analysts said. Comcast (CMCSA) is planning to enter the wireless market next year, and could use exclusive access to some of NBC Universal’s popular content to attract customers, noted Jonathan Chaplin, an analyst at New Street Research, on Friday.
Comcast already used content NBC secured from the Olympics to give its cable customers extensive access via the company’s X1 system.
“Comcast may have an advantage over AT&T across all of AT&T’s core businesses, and they have the advantage of a formidable content portfolio,” writes Chaplin. “Acquiring a comparable Content portfolio may be a good defensive move.”
Other analysts have been less positive about the possible deal.
“Though there could be some industrial logic to the speculated Time Warner-AT&T combination (similar to Comcast-NBC Universal in hindsight), we believe the upfront financial benefits do not seem as readily apparent,” Kannan Venkateshwar and Amir Rozwadowski, analysts at Barclays, wrote in a recent report on the possible deal. “As we detail, across several scenarios, it is difficult for us to see the positive financial benefits on a standalone financial basis.”
A deal could also draw fire from antitrust and communications regulators. They approved the Comcast-NBC Universal deal only with extensive conditions. And unlike Comcast, which has little direct competition on the cable side, AT&T’s wireless business is in the midst of a fierce competitive battle with the three other major wireless carriers.
“Political opposition to a deal of this size may well be considerable enough to dissuade AT&T from attempting it (or at least waiting),” Chaplin notes.
Some are also concerned about the huge debt load that AT&T would incur in buying Time Warner. AT&T already has $120 billion of debt. Adding too much more could threaten its investment grade credit rating, increasing its cost of borrowing. And massive debt service costs could limit the carrier’s ability to maintain or raise the dividend on its stock, which is one of the primary attractions for investors.