The Strategic Rationale For AT&T's Bid To Buy Time Warner

First To Offer Bundled Mobile Broadband And Video Content

Analyst Drew Borst sees the deal as providing product and geographic diversification, with Time Warner accounting for 15 percent of the combined company's revenues. The combined company would have the distinction of the first U.S. mobile provider to have a national bundle mobile broadband and video offering, the analyst noted.

Goldman is of the view that AT&T's customer relationships could be leverage to better deliver addressable advertising models and more tailored content.

Related Link: AT&T Unlikely To See Competition In Its Bid For Time Warner

AT&T's Expectations From Deal

• Accretive to earnings per share and free cash flow after the first year.
• Generate $1 billion in annual run rate cost synergies within three years and incremental revenue synergies, including from more targeted advertising, informed content decisions, etc.
• Net leverage ratio of 2.5 times after the first year.
• Before year-end 2017 closure following necessary approvals.

Valuation Of Deal

Goldman Sachs noted that the $108.7 billion purchase price, with 50 percent each in cash and stock, implies 12 times its 2017 EBITDA, reflecting an $85.4 billion equity value and $23.3 billion of net debt.

Rating Action

While noting that there are no changes to its estimates, Goldman Sachs said it is removing Time Warner from its Americas Buy List and Americas Conviction Buy List. The rating on the shares of the company was lowered to Neutral from Buy. However, the firm raised its price target for Time Warner shares to $103 from $93, incorporating an M&A rank of 1 and a move to blended fundamental M&A valuation of 50/50 percent from its 100 percent fundamental previously.

In pre-market trading, shares of AT&T were down 2.37 percent at $36.60 and those of Time Warner were down 1.10 percent at $88.45.

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