To Secure a Mega-Merger, AT&T Plans to Shoulder Mega-Debt


An AT&T store window in New York City. A deal with Time Warner would create a combined debt of about $175 billion.

Kena Betancur/Agence France-Presse — Getty Images

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 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 nonbank corporate issuer, and make it bigger than some financial institutions.

That debt load represents one of the biggest risks in the merger, experts and analysts say.

AT&T plans to issue about $40 billion in new debt to finance the cash portion of its $85.4 billion takeover of Time Warner, which was announced on Saturday. That is in addition to the borrowing that took place to purchase DirecTV for $48.5 billion in cash and stock, a deal that closed last year, and other corporate debt to fund ongoing operations.

“When they did the DirecTV deal, we thought they reached the limit,” said Mark Stodden, an analyst who covers AT&T for Moody’s Investors Service. “Now they’re back with this deal, which is even bigger.”

With interest rates near zero, corporations have benefited in recent years by being able to raise debt at inexpensive levels to fund acquisitions.

Last year, companies worldwide announced $4.7 trillion in deals — a record — with many of the acquisitions valued at more than $5 billion, according to data from Thomson Reuters. But if the Federal Reserve pushes rates higher and if the debt markets turn more volatile, then the money available to finance such big-ticket acquisitions will become more expensive.

And if cheap credit starts to fade away, that would be expensive to AT&T. Currently, the company will need to refinance about $9 billion a year, Moody’s estimates.

But AT&T can easily handle its current debt load. The company has an investment grade rating, meaning it is perceived to be among the healthiest companies, with a smaller probability of default.

Despite the size of the Time Warner purchase, AT&T says it will have no trouble taking on the additional debt. The two companies say that as they become integrated, they will be able to bring down the ratio of net debt to 2.5 times the combined entity’s adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, at the end of the first year after closing. That would be only slightly higher than AT&T’s current leverage.

And that modest increase may not penalize the company much, said Walter Piecyk, a telecommunications analyst with BTIG.

“This thirst for yield has provided very cheap cash, which they’ll be able to use to finance this deal even with an increase in leverage,” Mr. Piecyk said in a telephone interview.

In the takeover of Time Warner — the parent company of HBO, CNN and Warner Bros. — AT&T plans to use its own stock to fund half of the $85.4 billion purchase price, and will spend some of its cash on hand and issue new debt for the rest of it.

AT&T and Time Warner said in their announcement that they expected the deal to close before the end of next year. Shareholders, the Justice Department and possibly the Federal Communications Commission would need to approve the deal.

A number of antitrust experts say that the approval process could be quite arduous because there has been so much concentration already between telecommunications and entertainment companies.

AT&T has an 18-month commitment for an unsecured bridge loan representing about $40 billion. JPMorgan Chase accounts for about $25 billion of that, according to people who have been briefed on the terms. Bank of America is handling the remaining $15 billion, these people said.

These loan commitments, however, are more like insurance policies, and not intended to be used. AT&T will seek new debt closer to when the deal closes. That may not be for another year or so, creating some interest rate risk if there is a big change in the markets.

“They’ve gone to the ends of the earth to raise debt already,” Mr. Stodden of Moody’s said. “But how much more capacity does the market have is a good question.”

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23 October 2016 | 11:42 pm – Source:


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