Yesterday we asked if, coming at a time when AT&T’s organic results posted a mild disappointment, the latest megamerger involving Time Warner is a sign of the top.
As Dow Jones remarked in similar fashion today, “more than 15 years after it was part of one historic merger, Time Warner is getting bought again, and while AT&T Inc.’s $85 billion bid for the media company is not quite on a par with AOL’s historic $164 billion acquisition of Time Warner in 2000 (later revealed to be a historic blunder), it’s still a big enough deal that it’s drawing attention on the campaign trail from both candidates.”
To be sure, the deal – if it passes – will be the latest case study on how to merge content and distibution at a time when a fresh wave of new technologies is putting pressure on old-line businesses.
On the media side, consumers have more options than ever. Outfits like Amazon and Netflix are producing their own original programming, and doing it well. Hey, even Yahoo was making shows for a while. On the distribution side, AT&T gets “content” for new mobile platforms, which it will need to capitalize on, because the wireless business is cutthroat, capital intensive, and saturated already.
But while 16 years ago analysts were blindly optimistic, that is no longer the case. As summarized by the WSJ, here is Wall Street’s less than upbeat take on the biggest media merger in years:
However, for AT&T to succeed where AOL infamously failed in 2000 may not be the biggest hurdle. The biggest difficulty may be getting regulatory approval for the deal to close in the first place. As Reuters notes overnight, AT&T’s proposed $85 billion takeover of Time Warner Inc generated skepticism among both Democrats and Republicans on Sunday, making it more likely that regulators will closely scrutinize the effort to create a new telecommunications and media giant.
The biggest deal of the year, announced just over two weeks before the Nov. 8 U.S. election, is a gamble on a victory for Democratic presidential candidate Hillary Clinton and a continuation of the status quo on anti-trust and regulatory enforcement. The Republican candidate Donald Trump, who is trailing Clinton in the polls, has said he would block the takeover.
“AT&T, the original and abusive ‘Ma Bell’ telephone monopoly, is now trying to buy Time Warner and thus the wildly anti-Trump CNN. Donald Trump would never approve such a deal because it concentrates too much power in the hands of the too and powerful few,” Trump economic advisor Peter Navarro said in a statement on Sunday.
Clinton, who has expressed misgivings about other corporate mega mergers, has not yet commented on the takeover. A spokesman Brian Fallon told reporters on Sunday there were “a number of questions and concerns” about the deal “but there’s still a lot of information that needs to come out before any conclusions should be reached.” The Senate subcommittee on antitrust will hold a hearing on the acquisition sometime in November, said subcommittee chair Senator Mike Lee, a Republican, and the ranking Democrat, Senator Amy Klobuchar.
Tim Kaine, Clinton’s running mate and a senator from Virginia, said lawmakers and regulators would have to review the deal and “get to the bottom” of questions over whether the merger would decrease competition. “I’m pro-competition,” Kaine said on NBC’s “Meet the Press.” “Less concentration, I think, is generally helpful especially in the media.”
Kaine said he had not had a chance to review the details of the deal. The U.S. Justice Department, not the president, has the power to reject such a deal if it violates antitrust laws. AT&T said it is unclear if the Federal Communications Commission will also have jurisdiction to review the deal.
Case in point, just moments ago, the following headlines hit:
The one place where Wall Street skepticism is most obvious is in Time Warner’s stock price: at last check TWX was trading at $87.30, nearly 20% below AT&T’s $107.50 bid.
However, while both Time Warner and AT&T are aware of the inherent risks in the transaction, the biggest losers may be Wall Street banks, which have pledged some $40 billion in loans to make the deal a reality. As Bloomberg explains, “JPMorgan Chase has pledged $25 billion of the financing, with Bank of America Corp. providing the rest, according to a regulatory filing. That’s believed to be the most JPMorgan has ever promised for a deal, according to a person with knowledge of the matter who asked not to be identified without authorization to speak publicly.
The lending commitment alone would bring about $110 million to $130 million in fees for JPMorgan and Bank of America, according to estimates from consulting firm Freeman & Co. It also gives the banks an advantage on bond offerings that would find eager buyers among yield-starved investors. At the same time, the banks face the risk that the deal, along with a chunk of their balance sheets, would be tied up if regulators delay approving it.
“This could be an especially lucrative deal for the banking industry; they’re going to make a lot of money if the deal gets done” said Bert Ely, a banking consultant at Ely & Co. “The numbers on the credit piece look big, but I’m sure the credit risk will be spread widely. The big uncertainty hanging over this will be the battle for regulatory approval and what lender protections are included if the deal fails.”
A failed megadeal wouldn’t be the first for AT&T. In 2011, the company abandoned its takeover of T-Mobile USA because of regulatory hurdles. JPMorgan had lined up $20 billion to finance that deal. And as the chart below shows, the deal would be the fith largest M&A debt financing sold by Wall Street in history.
Coming a time of yield-starved investors from around the globe seeking to put money into anything with no regard for fundamentals, it is unlikely that the debt financing will have any difficulty finding willing homes. However should rates rise over the coming months as many predict n the not too distant future, potentially roiling the fixed income industry, and at a time when the deal is kicked back and forth between regulators and politicians, it just may lead to more than Wall Street can chew.