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Another Day, Another Potential Mega-Merger

In the August issue of Investing Daily’s Utility Forecaster, we predicted that another wave of consolidation was about to sweep the cable, media and telecom industries.

But given the swollen debt levels of some of the industry giants, we expected any deals to be smaller transactions focused on media content.

The companies that control the wires and the airwaves are increasingly focused on acquiring the assets that will ensure customers stay glued to their devices. But they’ve done a number of big deals in recent years, and we assumed that would limit their willingness to take on more debt.

We were right about the former. But boy were we wrong about the latter!

In late October, AT&T Inc. (NYSE: T), which was still digesting its $66.7 billion acquisition of DirecTV, announced another audacious bid, with a $107.1 billion cash-and-stock deal to acquire Time Warner Inc. (NYSE: TWX).

Time Warner’s divisions, which include HBO, Turner Broadcasting, and Warner Bros., would give the telecom giant a slice of the high-margin content it distributes. This proposed marriage is very much reminiscent of cable behemoth Comcast Corp.’s (NSDQ: CMCSA) acquisition of media giant NBCUniversal.

Naturally, the debt that AT&T will take on has made some analysts wonder whether its value proposition for income investors will necessarily change. Indeed, with AT&T starting to look like the snake that ate the baby goat, credit raters are warning that the firm can’t have its debt and offer a high dividend too.

Meanwhile, Verizon Communications Inc. (NYSE: VZ) has been involved in what, at first, looked like a more sensibly sized acquisition of Internet also-ran Yahoo. Unfortunately, the former search giant has since revealed that it suffered two massive data breaches a couple years ago, thus giving it the appearance of seriously damaged goods.

While Verizon is looking to renegotiate the deal, it may end up leaving Yahoo at the altar altogether. That’s because this week came news that the nation’s No. 1 wireless carrier is in very preliminary discussions about a potential merger with cable giant Charter Communications Inc. (NSDQ: CHTR).

A mega-merger with Charter would give Verizon thousands more miles of fiber-optic lines to fulfill growing demand for broadband Internet. And Verizon may also be able to use Charter’s network of cable wires to help supplement its spectrum during the roll-out of its next-generation wireless service.

Of course, Charter also has nearly 17 million pay-TV customers, though its footprint overlaps with Verizon in some markets.

Similar to AT&T’s transaction, a deal with Charter would add a huge pile of debt to Verizon’s balance sheet, while likely also requiring an equity issuance that would be massively dilutive to near-term earnings.

Previously, the telecom had stated it was anxious to reduce leverage back to more reasonable levels. But a merger between the $200 billion telecom and the $100 billion cable company would make the combined entity one of the world’s biggest corporate debtors.

Additionally, Charter’s stock was already trading at a super-premium valuation prior to these rumors emerging, which would make it difficult for Verizon to offer an even bigger premium to entice it to sell.

Consequently, a number of analysts have been skeptical that this latest news will amount to anything more than speculation.


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