(Reuters) -- AT&T said it would finance the cash portion of the purchase with new debt and cash on its balance sheet. AT&T said it has an 18-month commitment for an unsecured bridge term facility for $40 billion.
AT&T has only $7.2 billion in cash on hand. Further borrowing could pressure its credit rating as it already had $120 billion in net debt as of June 30, according to Moody's.
AT&T said the deal would add to earnings per share in the first year after closing. It said it expected $1 billion in annual run-rate cost savings within three years of closing, chiefly driven by lower corporate and procurement spending.
Shortly after the deal was announced, AT&T reported third-quarter adjusted earnings per share of 74 cents, the same as in the year-ago period and matching Wall Street's average estimate, according to Thomson Reuters I/B/E/S. It hiked its quarterly dividend by a penny to 49 cents per share.
Time Warner said its third-quarter earnings, which have not yet been announced, would show growth in revenue and operating income at each division and double-digit earnings growth.
Time Warner shareholders will receive $107.50 per share under the terms of the merger, comprised of $53.75 per share in cash and $53.75 per share in AT&T stock. The stock portion will be subject to a collar such that 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. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
The cash portion of the purchase price will be financed with new debt and cash on AT&T’s balance sheet. AT&T has an 18-month commitment for an unsecured bridge term facility for $40 billion.
The transaction will result in significant financial benefits, according to an AT&T press release.
AT&T expects the deal to be accretive in the first year after close on both an adjusted EPS and free cash flow per share basis.
AT&T expects $1 billion in annual run rate cost synergies within 3 years of the deal closing. The expected cost synergies are primarily driven by corporate and procurement expenditures. In addition, over time, AT&T expects to achieve incremental revenue opportunities that neither company could obtain on a standalone basis.
Given the structure of this transaction, which includes AT&T stock consideration as part of the deal, AT&T expects to continue to maintain a strong balance sheet following the transaction close and is committed to maintaining strong investment-grade credit metrics.
By the end of the first year after close, AT&T expects net debt to adjusted EBITDA to be in the 2.5x range.
Additionally, AT&T expects the deal to improve its dividend coverage and enhance its revenue and earnings growth profile.
The merger is subject to approval by Time Warner Inc. shareholders and review by the U.S. Department of Justice. AT&T and Time Warner are currently determining which FCC licenses, if any, will be transferred to AT&T in connection with the transaction. To the extent that one or more licenses are to be transferred, those transfers are subject to FCC review. The transaction is expected to close before year-end 2017.
5G IS COMING
Owning more content gives cable and telecom companies bargaining leverage with other content companies as customers demand smaller, hand-picked cable offerings or switch to watching online. New mobile technology including next-generation 5G networks could make a content tie-up especially attractive for wireless providers.
"We think 5G mobile is coming, we think 5G mobile is an epic game-changer," Rich Tullo, director of research at Albert Fried & Co, said in a research note, adding that mobile providers would be in position to disrupt traditional pay-TV services.
A previous Time Warner blockbuster deal, its 2000 merger with AOL, is considered one of the most ill-advised corporate marriages on record.
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