AT&T (T) sure doesn't like being AT&T. That's the first thing I think of when I see the $85 billion the company's paying to buy Time Warner (TWX) after just shelling out for $67 billion, including debt, for Direct TV just two years ago.
Really, can one company spend $152 billion in two years and not be thinking "our real business must be going away?"
It does seem to smack of an existential crisis, doesn't it?
First, let me just say that the regulators are in no mood for this deal. Once again, AT&T's lawyers are looking at the deal through textbooks and the regulators are looking at it through politics, mainly the politics of something that could somehow cause your already high phone bill go higher.
I write that because, of course, there is no real overlap at all. But it is easy to make the political case that this could hurt people and the concessions to be made would be too great.
Hasn't that been the pattern? The acquirer gets advised that there are no real issues because, traditionally, there might not have been, but we are in a different political environment, one where it is just easier to say no and then offer some sort of credible reason to not let it happen.
Why not? Who gets "in trouble" if they just say no? And think of the deals where the lawyers on the side of the acquirers made easy assertions that deals would get done recently, deals like Baker-Hughes (BHI) -Halliburton (HAL) , Lam Research (LRCX) -KLA Tencor (KLAC) . Or the ones where we had plenty of insight "not to worry", like Du Pont (DD) -Dow Chemical (DOW) and Bayer (BAYRY) -Monsanto (MON) .
These not-to-worry insights come from old text books about concentration, not new populist backlashes that come from deals like those in the airline industry that ended up raising fares.
In truth, there really isn't any obvious reason to block the deal. Does anyone really believe that any entity that supplies to these two companies will be squeezed? Does anyone think that your cable bill or phone bill will naturally go up? But it doesn't matter. It's the perception and that's what I think will matter.
How about what it says about AT&T? I think the company's management liked how its stock performed post the Direct TV deal. But I wonder if that weren't simply the case of a good dividend vs. low fixed income returns.
This deal is a twofer along those lines. With the Fed about to raise rates, that dividend doesn't seem so enticing -- hence the stock's decline from $43 to $37, just like many of the higher-yielding stocks. So why not take advantage of what the decline is saying and load up on debt to buy Time Warner?
Naturally, though, one has to wonder if the mountain of debt now on AT&T will be too much to pay that dividend or at least to grow it, which should put the stock out of favor.
In that sense, it seems like a bad read of what the shareholders want from AT&T. But then again, maybe AT&T's management sees the writing on the wall: four energized cut-throat competitors are now vying for subs, with the reinvigoration of Sprint (S) to go with the aggressive nature of T-Mobile (TMUS) .
Those last two seem to be winning-look at how Verizon (VZ) missed its projections for 800,000 sign-ups by about half, a stunning figure--so this deal could make it so AT&T has more to offer customers. That's the "they had to do it" to grow in an environment where Sprint's Marcelo Claure and T-Mobile's John Legere just can't be stopped without something special in the arsenal.
If that's the case, and it works because Randall Stephenson has a master plan to re-capture lost subs, than there will be growth and income if you own the stock even if the income seems iffier than Verizon's yield.
Could all of this be desperation, as my colleague Jack Mohr writes elsewhere? The price tag says yes: it's just too much money vs. what I think that AT&T gets out of Time Warner. The jeweled asset is HBO, which can be offered with the NFL package as some sort of distinguishing reason to go with AT&T over the other guys.
But I just can't see what else T gets. A weird sports package? A developer of programming, a business it knows nothing about? How complementary is it to the NFL ticket, which is the real asset of Direct TV?
That's a hard one to sell.
But phone companies are insular. I think AT&T looked at what Verizon was doing with AOL and Yahoo (YHOO) , looked at how ell its stock had been doing with Direct TV and didn't want to be left behind with the idea that there wouldn't be an asset left to buy. Sure, I hear people saying why not just buy Netflix (NFLX) , but remember Time Warner is much cheaper on earnings and much easier to justify to shareholders -- that is, if Randall Stephenson, the CEO, cared.
Now, let's take the other side. Time Warner has done great for its shareholders. So many had written this company off as one of the most vulnerable in a cord-cutting world and while CEO Jeff Bewkes was able to show convincingly in the last two years that the stock was undervalued now that it has cleaned itself and gotten rid of cable and magazines and AOL, there really wasn't that much more to do. A premium multiple would always now elude them. It was selling a little less than 13x earnings even after all that Bewkes had done. So let's just say that he was able to say no to Fox a couple of years back because he knew there was more value, he got the more value, he's 64 and it is time to ride off into the sunset.
The timing is pretty perfect.
Now, I think that Stephenson and Bewkes are like are like oil and water. That's not a match at all. We know Bewkes will be out soon enough, all the better for both, I have to imagine.
So my initial take: AT&T knows rates are going higher. It has the same kind of non-political advisers as everyone else. They don't recognize the tenor of the moment any more than the other antitrust lawyers advising all of the other challenged deals. So it's kind of what the heck, the business could be going away, they could be up against Action Alerts PLUS portfolio names Google (GOOGL) and Facebook (FB) in addition to T-Mobile, Verizon, Sprint as well as potentially Comcast (CMCSA) so why not try to get it done? Comcast's stock has been a winner post the acquisition of NBC -- having gone form $16 to $64 -- why can't AT&T's stock be a winner, even if it means the dividend can't grow? Comcast only yields 1.7% and it's had a big run. AT&T could do the same with Time Warner.
In the end, though, I come back to the regulatory issues. AT&T thought about buying T-Mobile in March of 2011 and got it wrong that time because of worries about competition lessening. I think AT&T will get it wrong this time because of worries of too much concentration -- nothing they teach you in antitrust law, but everything the populist political environment says.
So, my conclusion: don't buy either stock. Get income from steadier companies, get growth from faster growers. Both companies have now taken themselves out of the running for either.