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120 Billion Reasons Why AT&T May Need To Take Another Look At Time Warner

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120 Billion Reasons Why AT&T May Need To Take Another Look At Time Warner

Chatter of a merger between AT&T Inc. (NYSE: T) and Time Warner Inc (NYSE: TWX) helped boost Time Warner's stock to a new 52-week high of $86.75 on Thursday.

However, a Bloomberg report suggested that Time Warner's investors should be hopeful of a deal, and there are 120 billion reasons why.

Deals, Debt And Dliuted Equity

According to Bloomberg's Scott Moritz and Claire Boston, AT&T's desires to acquire Time Warner are constrained by its $120 billion debt load. Specifically, investors would be forced to accept another load of debt and maybe even a diluted equity stake — just a year after AT&T tapped the debt market to acquire DirecTV for $48.5 billion.

Related Link: Report: AT&T Considered A Bid For Time Warner

AT&T already has the third-lowest investment grade rating, and working out a deal with Time Warner in which it wouldn't see its debt downgraded to junk would be tough.

AT&T is rated Baa1 by Moody's Investors Services and BBB+ from S&P Global. The company is sitting on $7.2 billion of cash and said it will generate more than $16 billion in additional cash from operations this year.

"AT&T generates a great deal of free cash flow, and it definitely has the capacity in the debt market," Dave Novosel, an analyst with Gimme Credit told Bloomberg. "If it was done with a combination of equity and debt there's a pretty good chance they could stay investment-grade," based on a premium valuing Time Warner at about $70 billion.

Does Anheuser Busch's Success Bode Well For AT&T, Time Warner?

Novosel also pointed out that if Anheuser-Busch InBev SA NV (ADR) (NYSE: BUD) could get the necessary financing for its own $100-billion plus acquisition of SABMiller, then AT&T could similarly succeed in its ambitious acquisition, even if it takes a year to close.

Mike McCormack, an analyst with Jefferies Group also told Bloomberg there are other obstacles that would need to be overcome for a deal to happen. Specifically, a merger would face scrutiny from the regulatory authorities as the combined entity would control both distribution and content.

Moreover, AT&T hasn't even completed its integration of DirecTV and maintaining AT&T 5 percent dividend yield would be difficult moving forward.

At Last Check ...

  • AT&T was down 0.66 percent at $38.40.
  • Time Warner was up 1.61 percent at $84.33.

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