While a prolonged, uncertain battle with the Department of Justice over its Time Warner Inc. (TWX) purchase would weigh on AT&T Inc. (T) , Moody's Investors Service says says the telecom's credit profile would benefit if the deal falls apart.
AT&T agreed to pay $85.4 billion, or $108.7 billion including assumed debt, for Time Warner in October 2016. The telecom projected confidence that the deal would close this year, but Chief Financial Officer John Stephens said at a November investor conference that the "the timing of the closing of the deal is now uncertain." The DoJ reportedly requested that AT&T divest either the Turner cable networks, which include CNN, TBS and TNT, or DirecTV.
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"The deal would have resulted in a significant increase in leverage and financial risk that we felt was not offset by other benefits," Moody's analyst Mark Stodden said. "We put the ratings on review for downgrade when they announced the deal. If they were to terminate the transaction the financial impact is kind of limited."
If the deal falls apart, AT&T could be on the hook for a $500 million termination fee. AT&T has already raised $30 billion in debt for the Time Warner purchase, however. If the transaction does not close, Stodden said, the telecom would have to repay the debt at 101% of par--which would add a $300 million expense. AT&T has also likely racked up a bill from lawyers and lobbyists.
The bill could be substantially higher if AT&T had a protracted battle with the Department of Justice that lasts a year or more. The telecom would have to pay interest on the $30 billion in debt. "Now we're talking real money," Stodden said.
Stodden weighed the impact in a recent note. Blocking the deal would "harm, but not derail" AT&T's long-term video bundling strategy he noted. "If the uncertainty drags on for long, this could have negative consequences for AT&T, but the impact will be limited if the deal is ultimately approved," the analyst added.
AT&T already offers a deal on Time Warner's HBO with its wireless plans. "Without content ownership, AT&T would have less leverage over content costs and distribution rights," Stodden added. "But, since AT&T will still need to acquire a significant amount of its content rights from third parties, with or without owning Time Warner, its business plan will not be ultimately derailed if the deal breaks apart."
Trump's frequent criticism of AT&T could provide the telecom with ammunition if it challenges the merger review in court, KeyBanc Capital Markets analyst Andy Hargreaves suggested in a note.
"Despite a renewed bout of scrutiny around the deal, legal precedent remains firmly on the company's side, in our view, and political meddling appears more likely to reduce the odds of the DoJ filing to block the deal, as it would very likely be used against it in the ensuing case," Hargreaves wrote.
AT&T has told investors that regulators actually like vertical consolidation. Chairman and CEO Randall Stephenson said at a Vanity Fair conference in October that by TV distribution with cable channels, video production and wireless networks, AT&T could cut out margins that individual providers of those services would charge.
CFO Stephens reiterated the view at a November Wells Fargo Securities LLC conference. "If you look at this vertical merger, you can see that these types of mergers bring great benefits to customers and have very routinely been approved by the DOJ and the federal government," Stephens said. "In fact, a vertical merger like this hasn't been blocked for over 40 years."
Comcast Corp. (CMCSA) won approval for its purchase of a controlling stake in NBC -- from a Democratic administration no less -- in 2011. AT&T's purchase of Time Warner follows a similar model by combining a TV distribution network with film and TV production.
"We know of no strong legal precedent for blocking this deal, and can think of no sound argument for creating a new precedent,' KeyBanc's Hargreaves wrote. "The views of President Trump should have no direct input on the DoJ's work."
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