AT&T (T) is paying way too much for Time Warner (TWX) , TheStreet's chief investment strategist said Saturday after the telecom giant and entertainment powerhouse announced plans for an $85.4 billion tie-up.
Jack Mohr, who also co-manages Action Alerts PLUS with Jim Cramer as a charitable trust, said the merger's nearly $110 billion in total consideration is "staggering on so many financial levels" and "reeks of strategic desperation and financial destruction."
AT&T intends to buy Time Warner in a cash-and-stock deal that values the media conglomerate at $107.50 a share, or 20% more than TWX closed at on Friday. The deal's total value is $108.7 billion after including Time Warner's net debt. AT&T CEO Randall Stephenson called the merger "a perfect match of two companies with complementary strengths who can bring a fresh approach to how the media and communications industry."
But Mohr noted that the deal comes at a time when AT&T is still digesting its recent $50 billion mega-takeover of DirecTV, as well as a disappointing earnings report and a 15% share decline. He added that there's a risk that Time Warner's earnings are arguably "approaching peak levels, which makes the deal that much sweeter for TWX shareholders and that much scarier for anyone invested in AT&T."
The analyst also said deal will leave the combined entity with nearly $120 billion of net debt when AT&T was "already stretching to maintain its investment grade rating." All in all, Mohr believes AT&T shareholders "would be better off having a sustainable dividend payout and a company that maintains enough of a presence to make rational capital-allocation decisions before blowing up its balance sheet in one fell swoop.
"I think we're seeing this deal come from a sense of competitive urgency and a need to maintain relevance," he said. "Mix in fear, desperation and paranoia that an Alphabet (GOOG) , (GOOGL) or an Apple (AAPL) will come out of the woodwork and AT&T has made a gorilla offer like this."
That said, Mohr believes the merger "can make sense over the long term -- not because of the opportunity, but because of the risk that AT&T drifts off into obsolescence otherwise. Still, I think we'll look back at the size of this deal many years from now and consider it wildly overpriced irrespective of need."
He added that Saturday's announced tie-up is eerily reminiscent of AOL's 2000 purchase of Time Warner -- a deal that's now considered one of the worst in U.S. corporate history. Mohr said that AOL, which Time Warner eventually sold off to Verizon (VZ) , "is now a shell of a company."
(Jerry Kronenberg contributed to this report.)