AT&T: Beware Of Another Deal

| About: AT&T Inc. (T)

Summary

AT&T agreed to acquire Time Warner for $107.50 per share. .

The agreement comes as AT&T is still in the process of integrating DirecTV and proving the merits of that merger. .

The impact to the dividend is a prime concern of investors. .

Despite still being in the process of integrating the DirecTV deal, AT&T (NYSE:T) has already reached terms on a deal with Time Warner (NYSE:TWX). The deal is troubling considering some of the benefits from the last deal aren't working out as predicted.

Source: AT&T presentation

The stock has already taken a sizable hit as competitive threats in wireless remain an issue and AT&T probably rallied too far from $30 to $43 this year. The stock took some hits due to the Time Warner buyout rumors as well making the dividend yield above 5% potentially attractive.

Another Mistake?

Late on Saturday night, AT&T a deal where the wireless giant will pay roughly $85 billion for Time Warner or the equivalent of $107.50 per share. The amount is close to the rumors on Friday that sent Time Warner up nearly 8% to close regular trading at $89.48.

The deal consideration is as follows:

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.

So the deal is currently barely holding the $107.50 price with AT&T closing the week trading at $37.49, or less than $0.08 above the collar.

As a note, the DirecTV deal was announced on May 18, 2014 for a listed price of $48 billion. The majority of the $95 offering price was via the $66.50 per share in AT&T stock. The deal for Time Warner was very similar though the cash portion of the deal is significantly higher at roughly $42.7 billion.

Outside of cost synergies, the prime benefit of the DirecTV deal was bundling broadband, pay-TV, and wireless along with the NFL Sunday Ticket. Both are facing serious signs that the businesses peaked recently.

AT&T is struggling to report growth in both wireless and video. No sign exists that customers want bundled deals with a preference for cheap wireless plans from competitors or cord-cutting TV service.

For Q2, AT&T only added 257,000 postpaid phone subscribers. The video subscribers actually declined by 49,000 as the company cut 391,000 U-verse customers in an attempt to shift consumers to the lower content costs on satellite.

The NFL is facing historically weak viewer numbers that surely signals a peak in the NFL popularity or at least the amount of time available to watch games. With the proliferation of Thursday Night games and streaming options, one has to wonder how business will grow.

Through the first six weeks of the season, the TV ratings for the NFL are down big. The following table shows how weak all but one game was for week 6 including incredible 40% declines in the MNF and SNF games.

Source: Sports Media Watch

Similar to the DirecTV deal, buying Time Warner now smacks of buying the content company at the top. The company is highly influenced by cable networks that are only now in the crosshairs of cordcutters.

Viacom (NYSE:VIA)(NASDAQ:VIAB) has already faced the brunt of a younger generation moving online to YouTube owned by Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL). One has to wonder if adult leaning Time Warner networks like CNN, TBS, TNT and HBO don't start facing similar pressures.

In an eerily similar scenario, TNT recently signed a big massive deal with the NBA (analyzed here by Grantland). Back in 2014, Time Warner expanded the agreement with the NBA to increase the regular season coverage by 12 games to 64 games starting in the 2016-17 regular season. The deal lasts through the 2024-25 season.

The NBA deal includes existing coverage by ABC and ESPN plus another 10 games along with mobile content and additional programming. The total NBA contract went from $930 million per year to nearly $2.7 billion in part due to the expanded coverage.

One has to wonder if AT&T is again buying into the concept of live sports by buying access to the sports property at the top. At least, the NBA contract is for anther nine years.

For any sports junky, one realizes that far more live content now exists than anybody can watch. Adding NBA games or Thursday Night NFL games increases the amount of live coverage available to consumers, but the sheer volume means that something has to give. A NBA fanatic might watch the additional 12 games on TNT, but most casual fans won't making the premium payments for these additional games excessive.

Maintaining Dividend

While a lot of investors might fear that a $85 billion purchase of a company with a dividend yield that sat below 2% might impact the dividend payout of AT&T, one needs to understand that Time Warner had larger capital returns. Though most investors don't focus on stock buybacks, Time Warner actually regularly offered a higher net payout yield (net stock buybacks + dividend yields) than AT&T.

T Net Common Payout Yield (<a href=

T Net Common Payout Yield (NYSE:TTM) data by YCharts

Of course, the knock on stock buybacks is that the purchases aren't guaranteed like dividends, but one can easily conclude that Time Warner had the cash flows to pay a significantly higher dividend if the company so chose. The accretive deal from the start plus the $1 billion in synergies should secure the dividend payout.

Takeaway

The key investor takeaway is that my previous investment thesis projected that the dividend yield would exceed 5% before AT&T reached a bottom. A Time Warner deal is questionable from a strategic standpoint, but one should assume that the new entity maintains the dividend.

Disclosure: I am/we are long TWX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.