AT&T Disappoints With Time Warner Merger
We plan to lower our fair value estimate for AT&T as the firm is paying a rich price for Time Warner and we see limited strategic benefits.
We remain disappointed with AT&T's (T) capital allocation decisions. The firm plans to acquire Time Warner (TWX) for $107.50 per share, a 35% premium to Time Warner’s share price before deal rumors surfaced and a 26% premium to our standalone fair value estimate for Time Warner. Based on our fair value estimate, AT&T is paying about $18 billion more for Time Warner than it is worth on a standalone basis, equal to $2.90 per AT&T share. AT&T will fund half of the purchase price with its shares, which we believe the deal terms overvalue. As a result, the net loss of value to AT&T could be as low as $2 per share.
As we’ve written previously, we are skeptical of the strategic benefits of combining content ownership and distribution. Thus, we will likely lower our AT&T fair value estimate to around $35 after sifting through the deal details and listening to the conference call discussing the merger on Monday morning.
AT&T also released third-quarter results. The firm showed some progress in its effort to stem postpaid wireless and television customer losses, but not to an extent that would cause us to significantly change our long-term expectations. The firm lost 268,000 postpaid phone customers, better than the 383,000 lost a year ago, but still the eighth consecutive quarterly decline. AT&T's postpaid customers remain among the most loyal in the business (monthly churn declined to 1.05% from 1.16% a year ago). Like Verizon (VZ), however, the firm is struggling to attract new customers in the face of heavy promotional activity from Sprint (S) and T-Mobile (TMUS).
Within the television business, AT&T lost 31,000 net customers, less than half the number of a year ago. The Directv satellite business added 323,000 customers while the U-Verse segment shed 354,000. After a full year of operating Directv, we estimate AT&T is losing television customers at about the same pace as the industry, which continues to call the strategic benefits of the Directv acquisition into question, in our view.
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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.