Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Dear Time Warner Inc. shareholders, this is why we can't have nice things. Like takeover premiums. 

Just as AT&T Inc.'s $109 billion acquisition of Time Warner is looking like it stands a good shot at winning regulatory approval, the media and entertainment company's shareholders may go and mess it up for themselves. According to CNBC's David Faber on Wednesday, some Time Warner investors are now saying that CEO Jeff Bewkes may have sold the business too cheaply, in light of President Donald Trump's plan to slash the U.S. corporate tax rate to 15 percent.

Getting Warmer
Here's a back-of-the-envelope way of looking at the likelihood of AT&T completing its Time Warner purchase. Recent trading implies strong odds:
Source: Bloomberg
Calculation is based on Time Warner's stock relative to the offer price and its unaffected share price before the deal was announced.

Mind you, it's already been six months since the transaction was announced and more than two months since shareholders approved it. And when they did vote, 99 percent of the shares were cast in favor of the deal. This isn't the time to get greedy. 

Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn are expected to unveil the principles of Trump's tax proposal Wednesday afternoon. While the news lifted U.S. stocks and the dollar, my colleagues in Bloomberg News have cautioned that the cuts Trump envisions may be too large to be anything but temporary. Fundamental analysts also largely haven't begun factoring in such tax cuts to their models for the companies they cover. So why should it be a factor in a transaction agreed to six months ago, especially if the long-term benefits aren't a sure thing? Is this worth holding up a $109 billion deal for?

The tax stuff aside, Time Warner isn't selling for a cheap price. AT&T is paying $107.50 a share, to be split between cash and stock, and will assume the target's debt. The offer is 36 percent higher than Time Warner's unaffected share price before the transaction was made public in October, which is an above-average premium for large acquisitions in the media industry. 

The transaction value works out to around 12 times this year's estimated Ebitda for Time Warner. While certainly not outlandish relative to all the expensive deals we've seen the last few years, it's by no means a small figure for such a risky megadeal. Should Time Warner's profits continue to grow, then the multiple shrinks, which is true of any deal. But it's when management starts gazing too far into the future and baking in potentially overly optimistic estimates that their deals turn destructive.

Furthermore, this is not a buyer with any expertise in the business of making TV shows and movies. AT&T is a wireless carrier with some satellite-TV customers, and one that's used to predictable cash inflows and outflows. It's making a bet on the future of mobile video -- but its ability to successfully integrate and grow Time Warner toward that end is not a given. AT&T -- which doesn't want parallels being drawn between this deal and the infamous AOL-Time Warner disaster -- has left itself little room for error.

This merger was struck just a couple weeks before the U.S. election surprise, and Trump had skewered the companies on the campaign trail, saying the deal will put too much power in the hands of too few. He was also speaking from a place of personal hatred for CNN, the network owned by Time Warner. While not technically possible for President Trump himself to block the merger, there was a point at which it didn't seem entirely impossible either. 

Since he's taken office, the tone around the deal has changed and regulatory approval is looking more likely than not. So, it's made it this far. If shareholders want their takeover premium, they'd be wise not to stand in their own way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Overpriced deals are also contributing to the troubling trend we're seeing of rising goodwill levels, which Gadfly's Chris Bryant and I delved into recently.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net