Mergers Would Make AT&T, Comcast Worlds Most Indebted Companies

https://www.wsj.com/articles/mergers-to-make-at-t-comcast-worlds-most-indebted-companies-1529314201?mod=hp_lead_pos2

Summary,

The potential mergers of AT&T with Time Warner Inc. and Comcast with 21^st Century Fox Inc. would create two firms that would carry the largest combined debt loan in the world. Estimated at $350 Billion, analysts are raising caution flags and signaling to investors that they should paid close attention to the performance of these firms; assuming the mergers go through of course. Here are the key points of the article.

The size of these proposed mergers are unlike any seen in recent history. If both transactions are completed, the debt (bond) of the two firms will comprise 3.31% the U.S. IG Corporate Bond Index. This is a considerable percentage and it is unprecedented.

Investors and analyst are concerned that if either firm does not execute its post-acquisition business strategy, it will not be in a position to service its debt load. This anxiety is beginning to result in external stakeholders evaluating their options to mitigate their risks.

The credit ratings of AT&T have been cut by Moodys and the S&P to slightly above junk status this past Friday. With one agency with AT&Ts debt was about 3.5 times EBITDA (Earnings Before Interest, Taxes and Depreciation/Amortization), post deal, a downgrade was warranted. In addition some investors are planning and executing their exit strategies from the bonds for both firms. In an effort to beat the rush to the exits in the event either firm falters.

General observations about the article:

This article is relevant to our coursework, more specifically there are direct linkages to the key concepts such as Cash Flow and Long Term Financial Planning. The article contained both opinions and well as facts. It provided a set of economic metrics that were fact based and potentially helpful to the reader in understanding general bond market trends. As well as some of the specifics of the AT&T and Comcast proposals. Based on that, Ive concluded that the article was complete and fairly accurate for what it was. I did not believe it was written for investors interested in either company, but instead it seemed to be an overview of the bond market. I observed no specific flaws in the writers logic. There were clearly areas where the author speculated about what could happen in the event of missteps by either firm. The articles author provided the perspectives of industry analysts, fund managers, AT&T management and his own. By doing so, the author provided different views on the risks and opportunities associated with financial leverage. The reader was able to compare and contrast the views of different stakeholders to gather a more complete picture of the topic. In conclusion, if youre already a shareholder of one of the two firms, youre likely learned little. As both firms already carried significant debt loads based on operating in the telecommunications business. I thought I detect some bias in the writers perspective about the future economic environment (please see question #3). In closing, I believe a potential investor would be better served by attempting to fully understand the firms long term strategy behind these transactions and whether those goals would deliver value to the owners of the firm. You can see AT&Ts high level vision here: http://about.att.com/story/att_completes_acquisition_of_time_warner_inc.html

Questions

1) What financial statement would you rely on the most to predict whether either firm will be able to meet its new debit obligations? What rationale drove your decision? Identify two ratios you would use to begin your analysis.

2) Officials at AT&T and Comcast say the refinancing risk from their post-deal debt would be minimal because they plan to quickly repay much of the debt with cash generated from the combined businesses. AT&T, for example, is expected to produce $8 billion to $10 billion of free cash flow that could be applied to debt reduction, analysts say

As an investor or a current stockholder, what steps can you take to begin to test the assertion made by AT&T management? Assume managements estimates about free cash flow are valid. Would investing in corporate bonds issued by AT&T be wise? And if so, why?

3)and the medium for such leverage for such companies rated investment-grade has jumped 30% since the eve of the financial crisis in 2007,

a decadelong surge in corporate borrowing that is stoking investor anxieties about what will happen as the economy slows and global interest rates rise.

how companies will refinance their record-breaking debt loads when capital markets experience their next significant downturn.

an easy choice given low borrowing rates created by ultraloose central bank policies across the globe.

As an investor, would these comments, catch your attention? Do you believe the author is trying to communicate something in addition to core theme of the article?