AT&T is unlikely to rush to sell an expected $30 billion bond to fund its acquisition of Time Warner with analysts giving the M&A only a 50% chance of getting the green light from regulators, said bankers.
The wireless giant has a $40 billion bridge loan in place from Bank of America (BAC) Merrill Lynch (BLKRF) and JP Morgan (JPM) to help finance the $85.4 billion acquisition—about three-quarters of which is expected to be taken out in the US investment-grade bond market.
With primary markets on fire in recent years, companies have taken out the bridge loan with a bond issue within months of announcing an acquisition.
But AT&T (T) is expected to bide its time as its deal may face pushback from US regulators who have been taking a tougher stance on tie-ups deemed to be anti-competitive.
“The merger may ultimately not be approved,” said CreditSights analysts.
“We feel the odds are around 50/50 at this stage.”
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The purchase of Time Warner (TWX) would give AT&T control of cable TV channels HBO and CNN and film studio Warner Bros—which is expected to raise red flags with the regulators.
“The primary concern is that AT&T could either restrict access to some of Time Warner’s content or that it could charge excessive amounts to other distributors,” GimmeCredit analysts said.
“That would eventually result in higher prices for consumers, and form the basis for rejection.”
Similar concerns raised by the Department of Justice and US Treasury led to many large M&A deals like Office Depot-Staples, Baker Hughes-Halliburton, Allergan-Pfizer, and Norfolk Southern-Canadian Pacific Railways, to fall apart this year.
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Against this background, AT&T may prefer to not rush to sell debt it may not ultimately need, said bankers.
“There is no reason for them to finance the M&A early given the ambiguity around the deal,” one senior banker not directly involved in the situation told IFR.
A banking source close to the AT&T deal told IFR that more certainty on regulatory approval would be needed before the bond financing could be launched.
“As is the case for most investment grade bridges, issuers typically tap the bond market once there is regulatory approval or confidence that it will be forthcoming,” the source said.
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This thought process may be behind why AT&T has taken a 18-month bridge loan—slightly longer than the more usual 12-month period for such facilities.
“Broadly speaking, CFOs may be more comfortable doing the bond financing for an acquisition when there is at least a 90% probability of getting regulatory approval,” another senior banker told IFR.
“That does not seem to be the case at the moment.”
In any case, doing the deal now, rather than wait until early 2017, could be more expensive for AT&T.
Some buyside participants also said a large deal from AT&T—which has issued $10 billion this year in US dollar bonds and sold a $17.5 billion issue financing its acquisition of DirecTV in 2015—would have to be priced with enough premium to interest investors who may be full up on the name.
“Investors are still trying to digest AT&T paper,” said Matt Brill, senior portfolio manager at Invesco.
“There’s pressure on AT&T across the curve and the whole telecom sector in general.”
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AT&T’s funded debt balance could exceed $170 billion following the transaction close and average annual maturities will be greater than $9 billion starting in 2018, Moody’s said.
The rating agency said many fixed income investors have limited capacity to buy more AT&T debt.
“The fixed income market’s capacity will be further stressed following the acquisition of Time Warner, and possibly more so if AT&T’s ratings are downgraded,” it warned, as it placed the company’s Baa1 ratings on watch for downgrade—likely limited to one notch.
Some bankers said AT&T could still come to the bond market later this year, or early next to refinance existing bonds.
“They could still do a deal under the guise of general corporate purposes later this year but it may not be as large as $30 billion,” one of the bankers said.
AT&T, Bank of America Merrill Lynch and JP Morgan declined to comment on the timing of the bond. Time Warner did not immediately respond to emails and calls.
