What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing today we're doing a video about corporate mergers and acquisitions. Acquisitions are often motivated by cost rationalization and synergies arising from the integration of two companies. Also, the acquisition of small early stage companies can have huge upside potential. For example, google acquired youtube in 2006 for 1.65 billion dollars.

It has since grown into a behemoth with more than 6 billion of revenue in the first quarter of 2021 alone. But not all mergers are this successful today we're looking at what many call the most disastrous merger in history we're talking about at t's 2018 acquisition of time warner in october of 2016 at t announced that it had entered into a definitive agreement to acquire time warner For 107.50 per share, representing a total valuation of 108.7 billion dollars, including time warner's existing debt load, this was a roughly 40 premium over time. Warner's existing share price, so the stock immediately jumped on the news time warner owns, iconic media assets, including the warner brothers film studio, the hbo pay television network, as well as numerous cable tv channels, such as cnn and others at t, is a telecommunications and broadband company That primarily provides cell phone and internet service to customers. They also own the television distributor, directv directv paid time warner for content.

The rationale for the deal was as follows: att can leverage its connection over 100 million cell phone customers to sell subscriptions to time warner's media content. This seemed like it could be a good idea, but closing the deal proved not to be nearly as easy as they had hoped. When the deal was first announced in 2016, then presidential candidate donald trump said his administration would block that deal as it represented too much concentration of power. Trump has been a long-time critic of cnn, which is owned by time warner in 2017.

The trump administration made good on his campaign promise ensued to block the merger, the legal grounds for the objection centered around att's existing ownership of directv directv buys media content from producers, including time warner and offers these shows to consumers for a monthly fee. Once a t and time warner merge, they could potentially stifle their competitors by reducing access to time, warner's content. For example, they could refuse to sell content to dish networks or charge prices so high as to make any deal impossible. This would give directv a competitive advantage over dish and its other competitors, but at t maintained that the deal was not anti-competitive but actually necessary for them to compete with the large tech giants on the streaming front.

While the combined entity of at t and time warner would be the biggest telecommunications or cable tv company in the us, its valuation was dwarfed by amazon. Even at a time, if you strip out the value of the telecom assets, the content business of a t would probably be smaller than netflix linear tv providers, including directv, have been rapidly losing share to direct consumer streaming offerings by combining atnt and time warner. They would. Finally, have the necessary scale to make their own direct to consumer product almost two years after the deal was announced, a judge sided with atnt and approved the deal in june of 2018..

The executives at at t celebrated the win after two long years in the legal system, they were ready to get to work on integrating the two companies straight away, but in hindsight it may have been better for att's shareholders had the judge prohibited, the deal 18c borrowed. Tens of billions of dollars to fund the acquisition by the end of 2018, they had 166 billion dollars of long-term debt. They made a little bit of progress, paying it off, but as of the end of 2020, this still stands at 154 billion dollars. This makes them the most indebted non-financial company in the world.

Their excessive debt load limited how much they could spend on original content for their direct to consumer hbo max offering they spent about 2 billion on content in 2020 and planned to spend an additional 1 billion dollars in both 2021 and 2022.. While this sounds like a lot of money, it's meager compared to their established competitors, netflix is planning to spend 17 billion dollars on content in 2021. Disney is planning to ramp up its spending to more than 14 billion per year by 2024, between disney plus hulu and espn plus. They also need to spend tens of billions of dollars to invest in 5g infrastructure over the coming years if they want to stay competitive with verizon and t-mobile.

Their balance sheet is simply too weak to compete seriously in streaming between hbo and hbo. Max at c has 67.5 million streaming. Customers disney plus has 116 million netflix blows, both of them away with more than 200 million subscribers. In hindsight, the time warner merger is widely considered to be a disaster for att shareholders.

Many of the projected synergies never materialized and they weren't able to pay down the debt burden as quickly as many investors hoped. The stock has declined by almost 30 percent. Since the deal was announced in 2016. during the same period, the s p 500 has more than doubled.

Part of this can be attributed to underperformance of the entire telecommunications industry. However, att's closest competitor verizon increased 7 during the same period. While this isn't a great return, they at least preserve their shareholders value. This is more than a t can say: verizon didn't make any large acquisitions and instead focused solely on its core telecommunications business.

They didn't experience any massive growth, but they were able to maintain their current position and pay out a respectable four and a half percent dividend yield, giving att's abysmal performance over the past five years. One of the main reasons anyone still owns the stock is its 7.4 dividend. This is one of the highest yields of any stock in the s p. 500..

The top executives of at t were well aware of this and made a point of reassuring investors that the dividend was safe in april of 2021, the recently appointed at t, ceo, john stanky, went on cnbc and implicitly said that the dividend was safe. Your dividend right now is yielding 6.9 percent. What would you tell shareholders who look at that dividend? Is that something that is number one priority for you number two number three: how do you kind of balance all of those eggs? My first priorities get the stock price up, so the dividends not the yield is not 6.9 percent and uh. You know that's what i'd like to do to fix the problem, while he didn't explicitly say that they had maintained the current dividend, he suggested it by saying the percentage yield would go down as the stock price goes up, paying the dividend cost them roughly 15 billion Dollars per year, given their high debt load and upcoming investments, it was becoming increasingly apparent that the dividend was not sustainable.

About a month later, in may of 2021, they finally announced that they would spin off warner, media and merge it with rival media company discovery. The deal is structured as a reverse morris trust, which will create a new publicly traded entity which owns the assets of both warner media and discovery. Under the terms of the deal at t will receive 43 billion dollars in a combination of cash from discovery and debt reduction, as some of their debt will be transferred to the new entity. Att shareholders will also receive newly issued stock worth 71 of the new entity.

The deal is expected to close in the middle of 2022. inclusive of debt at t paid 108.7 billion dollars for time warner in 2018. after receiving 43 billion dollars. They need their stake in the new entity to be worth at least 65.7 billion dollars for them to even break.

Even the equity of the new entity would need to be worth 92 billion dollars for this to be the case with discovery's market cap at 14 billion dollars in time, warner's original equity value at 85 billion dollars. It's actually possible that the new entity can achieve a 90 plus billion dollar valuation. We'll have to wait and see what the valuation is when the new entity starts trading, but it's possible that 18t shareholders will make a profit on the transaction. One of the most controversial parts of the deal is its impact on att's dividend.

They say they expect a roughly 40 payout ratio on their anticipated twenty billion dollars of free cash flow. This translates to an annual dividend of about one dollar and sixteen cents. This is roughly half of their current dividend. Payout, mad money host, jim cramer, puts att's current and former ceos on his wall of shame.

He calls the 2018 time warner merger disastrous and the decision to cut the dividend shameful. However, the situation is a little bit more complicated than kramer makes it out to be at the time of recording this video att's share price is 28 dollars and 14 cents owners of at t will receive shares worth 71 of the new entity. This is a big question mark because we don't know what the value of the new entity will be. We'll only know for sure, once it starts trading as an independent public company in 2022., based on time, warner's purchase value in 2018, discovery's current market cap and the debt load of the new entity.

We estimate the 71 stake to be worth a little under 8 dollars per atm t share. This means the residual value of at t is about twenty dollars per share, based on the company's own estimates, they'll make about two dollars and eighty cents per share of free cash flow and pay out a little more than forty percent of this as dividend. This would give an annual dividend of one dollar and sixteen cents or a five point. Seven percent yield as part of the deal.

A t also gets cash in debt reduction worth about six dollars per share. This will help them deleverage the balance sheet and make the dividends safer. These are just back of the envelope calculations and nothing in this video is financial advice. The future yield is highly dependent on the valuation of the new entity, which is still uncertain.

We've included a link to att's official press release in the description below you can read it yourself. If you want to understand all the details, while the yield will decrease from its current levels of 7.4 percent, it won't be cut. In half, like jim cramer said it will likely be cut by around a quarter to 5.7 percent. Due to the complicated nature of the discovery transaction, many commentators in the financial media misunderstood the deal and think that it's worse than it actually is, for example, bloomberg anchor david weston completely misunderstood the transaction.

In an interview with the at t ceo, he failed to consider that the att shareholders will receive 71 of the new entity. There was a major strategic decision made to really move into the media business as a telephone company and now you're really reversing that you're going to go back to your roots, the telephone company. Let me understand looking back at it now was the strategy wrong or did something change in between, because, let's be frank, you're leaving somebody on the table, there is some value being destroyed. Well, i'd, probably dispute whether or not there's value being destroyed.

I'd actually say that we've managed to increase the value of the assets we bought by maybe about 30 percent. If you look at the cash we've taken out of the business, the assets we sold and the effective value of this transaction and and some reasonable assumptions once it trades as to how it's uh it's going to trade at a multiple john, i just want to understand That i think you bought it at 85 billion dollars. This is 43 billion. Are you saying you got that difference out in cash? Well we're getting 43 billion dollars in cash, we're getting 71 percent of the equity of the new, the new business uh.

So there's two parts to that: the media is quick to call the deal a disaster, because this makes for more sensational headlines, which then generate more clicks and views. The reality is we don't yet know if the deal is a disaster. If the combined entity ends up trading at an equity valuation in excess of 92 billion dollars, the deal was a success. If it trades at a valuation below this, you could say it was a failure.

We'll have to wait until 2022 to find out alright guys that wraps it up for this video. What do you think about the 18t discovery deal? Let us know in the comments section below if you enjoy this content, make sure to smash the like button and subscribe. So you don't miss future uploads as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.