AT&T Acquisition of Time Warner

Hi guys, just came across the news that AT&T is considering divesting its Latin American Pay TV to utilize the funds gotten thereof to pay down debts following from its planned acquisition of Time warner. Though it is assumed that the Latin American Pay TV is valued at just around 9 percent of the proposed takeover of Time Warner, valued at US$85.4 billion, it should be able to pay down around 4 percent debt to be incurred by AT&T following the acquisition as it is estimated that AT&T would have around US$ 180 billion after the acquisition.

For those who don’t know, the Latin American Pay TV being discussed is DirecTV Latin America. The Pay TV Company runs a subscription based television service in Latin America and it is a subsidiary of DirecTV which was acquired in 2015 by AT&T in a US$49 billion acquisition deal. DirecTV Latin America owns many TV channels, and produces several television content.  Currently, AT&T has around 13.6 million total subscribers in Latin America excluding Mexico.

Taking a look at the almost finalized acquisition of Time Warner by AT&T, we believe it is a steal and sold at a discount at just US$85.4 billion. Also, this deal is seen as a game changer for AT&T with a potential of providing tremendous upside to the acquirer. The deal is expected to close before year end.

Time warner surpassed expectations in their second quarter result of 2017, with better than expected profit and revenue. Highlights for Time warner’s Q2 2017 includes: Revenues increased 5% to US$7.3 billion, Operating income and adjusted operating income totaled US$ 1.7 billion and US$1.8 billion, respectively, EPS grew 12% to US$1.34. For the first six months of 2017, Cash Provided by Operations from Continuing Operations reached $2.5 billion and Free Cash Flow totaled $2.3 billion, increasing 25% and 22%, respectively, compared to the first six months of 2016.

Back to the expected merger with AT&T, details of the expected transaction include:

• Time Warner shareholders will receive $107.50 per share, which will be 50% stock and 50% cash. For the stock portion, Time Warner shareholders will receive 1.437 AT&T shares if AT&T’s average stock price is below $37.411 at closing and 1.3 AT&T shares if AT&T’s average stock price is above $41.349 at closing.

• This purchase price implies a total equity value of $85.4 billion and a total transaction value of $108.7 billion, including Time Warner’s net debt.

• The cash portion of the purchase price will be financed with new debt and cash on AT&T’s balance sheet.

So what’s in it for AT&T you may ask. Well the following benefits are expected to be enjoyed from the acquisition of Time warner by AT&T

• AT&T expects an accretion of its shares in the first year after close on its EPS and free cash flow per share basis. This is because Time Warner currently has cash flows in excess of US$2.3 billion and operating income remaining steady.
• Acquisition of Time Warner opens up new revenue streams for the telecoms giant. The planned acquisition will provide AT&T with rights to the various businesses of Time Warner including Warner Brothers Entertainment (television, feature film, home video and video game productions and distribution); the HBO family (including HBO Now and HBO Go); and Turner (including CNN, TBS, TNT and the rights to MLB, NBA and March Madness broadcasts), as well as investment in OTT and digital media such as Hulu, Bleacher Report, Fandango and CNN.com.