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AT&T's Plans to Cut Time Warner Buyout Costs Meet Resistance

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Per Bloomberg, AT&T Inc. (T - Free Report) is witnessing some resistance from the company’s bondholders, in its efforts to reduce the cost of borrowings related to its planned acquisition of Time Warner Inc. (TWX - Free Report) , an American mass media and entertainment conglomerate.    

AT&T has categorically proposed two options to get the deal. First, is an offer to buy back from investors some of the bonds used to fund the acquisition. The second is to swap the bonds into new securities.          

However, either of the two cases would cost AT&T a small premium but substantially less than the 1% it will otherwise have to pay, costing $1 billion including interest.  

AT&T had issued these bonds last year, with a stipulation that if the deal wasn’t completed by April 2022, then the company would buy back the bonds at 101% of the face value.   

At least four money managers that are among the biggest holders have decided to reject either options while two others have agreed for the swap. A significant number of investors could accept either.   

Representatives of AT&T and Time Warner, however, did not comment on the subject.  

Rationale Behind the Move

It is believed that, AT&T’s total debt repayment inclusive of accrued interest since the date of issuance of bond, could be as much as $1 billion. To reduce that liability, the company is now seeking to minimize the interest burden to the possible extent. It now plans either to buy back those debts or have the bondholders swap into new securities, having the same coupon and maturity but different terms.    

Also, a cash offer by the company in this connection gave some of the bondholders an extra 0.25 cents on every dollar to tender their securities. The buyback offer relates to a subset of the debt with the problematic term known as a special mandatory redemption (SMR) clause.

AT&T’s second effort to reduce costs will involve it swapping SMR provision out of those securities in an exchange deal for the same fee, which is also beneficial for AT&T’s because the clause requires it to buy back bonds at 1% premium, bit higher than present trade value.  

Swap Option

Last week, AT&T stated that in order to qualify for the exchange offer, it must receive consent from investors representing at least $300 million of the outstanding value on the bonds due 2037, 2050 and 2058.

However, the bonds due 2023 do not have any minimum condition requirement. Also, there is no stipulation for the cash offer to hold good. Some bondholders like pension funds and insurers have the incentive to go for the exchange, since they need longer-dated assets to match their liabilities.   

All the bonds under discussion were sold in July 2017, for the Time Warner acquisition. The April 2022 deadline was given on the bond documents. The companies later agreed to make it June 2021.

After the U.S. Justice Department sued to block the $85 billion combination on antitrust grounds, arguing that the deal will raise prices for pay TV subscribers, the risk of missing the acquisition deadline seems high. However, the trial is in process.   

Share Price Performance

Over the last three months, shares of AT&T have outperformed the industry with an average loss of 5.5% compared with a decline of 6.6% for the latter.             



AT&T carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are United States Cellular Corporation (USM - Free Report) sporting a Zacks Rank #1 (Strong Buy) and SITO Mobile, Ltd. (SITO - Free Report) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.                

United States Cellular has an expected long-term earnings growth rate of 1%. It exceeded earnings estimates thrice in the trailing four quarters, with an average of 306.5%.    

SITO Mobile has an expected long-term earnings growth rate of 25%.     

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