Deals

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

Of all the big telecom and media M&A possibilities still out there, a merger of Verizon Communications Inc. and Walt Disney Co. would seem to be the least likely to happen -- and not just because Verizon CEO Lowell McAdam poured cold water on the idea this week.  

McAdam has certainly made it clear that his door is open to any media moguls interested in discussing a mega-deal with the wireless giant. It makes sense that he'd be eager to seek out a partner in entertainment after rival AT&T Inc.'s splashy $109 billion deal for Time Warner Inc. Already this year, a deal between Verizon and Charter Communications Inc. was floated and then faded away after Charter struck an alliance with Comcast Corp. Since then, a Verizon-Disney merger has become the prevailing thought. 

There's just one small problem: Verizon couldn't afford to buy either of these purported takeover candidates, even if it wanted to. And others that may be on its list are likely off limits, too.

Red With Envy
Verizon, the biggest U.S. wireless provider, is lagging behind shares of all its closest competitors, which are actively pursuing big M&A transactions
Source: Bloomberg

Ever since AT&T announced the Time Warner takeover nine months ago, there's been talk of more tie-ups between companies that create TV and movie entertainment and those that distribute it through their pipes to viewers. Within the last few months, McAdam himself has even stoked some of this speculation, which has only intensified as he attends the annual outdoorsy gathering of industry bigwigs this week in Sun Valley, Idaho. When reporters caught up with McAdam there to ask if he's eyeing a Disney deal, his answer was frank: "No." 

Disney is considered ripe for some sort of deal or breakup as the sprawling conglomerate comes up short for a succession plan for Iger, 66, though the company has bought itself some time by extending his contract to July 2019. Despite its struggles with the ESPN division, any potential sale of Disney would still command a decent premium for shareholders -- and beyond what Verizon could pay. A typical takeover premium of 30 percent would imply an offer of about $135 a share, enough to top Disney's all-time closing high back in August 2015 of $121.69. 

An all-stock deal would be too dilutive for Verizon's shareholders, and Disney owners also may not want much Verizon stock, which fetches a much lower valuation relative to profit. But coming up with cash instead is tricky, even for a company Verizon's size.

Scary Big Numbers
A Disney deal split 50/50 between cash and stock would increase Verizon's debt way too much, while offering less cash won't appeal to Disney shareholders
Source: Bloomberg

Verizon's net debt of $112 billion is already 2.7 times its trailing 12-month Ebitda. If it were to pay half of our hypothetical $135-a-share bid in cash for Disney, Verizon's net leverage ratio would spike to about 4 times -- much more than AT&T is stretching its balance sheet to buy Time Warner. This would most definitely lower Verizon's credit quality, if not cause it to potentially sacrifice its investment grade rating, which is currently BBB+.  

On top of that, the deal would lower the combined company's profit, even assuming generous cost synergies. Nobody wins in this scenario, except the bankers. The chatter around a Charter merger died for the same reasons. Sure, never say never, anything is possible, etc. But the math simply doesn't work, and if that's the case, there really is no point in proceeding any further with the idea. 

Error
Financially, it just doesn't make sense for Verizon to try to buy Disney, even if there's some strategic logic to the idea
Source: Bloomberg

Two other names that have come up as possible candidates for Verizon are CBS Corp. and Dish Network Corp., and in fact I've written that Dish would make sense. Both also have sub-$50 billion market caps, making the math slightly less murky. However, Dish is reportedly on Amazon.com Inc.'s radar now -- a preferable partner to Verizon. And as far as CBS is concerned, it's tough to imagine the company wanting to sell to Verizon so long as Shari Redstone and Les Moonves are in charge. What a culture clash that would be.

McAdam seems to enjoy having Verizon's name in the mix when it comes to industry deal chatter. But is there a dance partner out there for Verizon? I struggle to come up with a name.

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

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