AT&T legal win could spur another jumbo bond; more M&As
AT&T’s court victory on Tuesday will likely mean the company will have to return to the bond market to fund its US$85bn acquisition of Time Warner, investors told IFR.
Judge Richard Leon of the US District Court for the District of Columbia ruled the deal could go ahead - over a year after it was first announced.
The ruling, released after 4pm ET, came with no conditions, and the Judge urged the government not to seek a stay of ruling, according to Reuters News.
AT&T General Counsel David McAtee said the company will close the merger on or before June 20.
The trial lasted for six weeks, with the government suing to stop the deal over concerns about its impact on competitors and consumers.
“We will closely review the Court’s opinion and consider next steps in light of our commitment to preserving competition for the benefit of American consumers,” Assistant US Attorney General Makin Delrahim, said in a statement.
Reuters reported that the merger, including debt, would be the fourth largest deal ever attempted in the global telecom, media and entertainment space, according to Thomson Reuters data. It would also be the 12th largest deal in any sector, the data showed.
AT&T closed at US$34.35, up 0.49%. Time Warner closed at US$96.22, up 0.052%.
After the ruling, AT&T was down 2.125% and Time Warner was up 4.55% in extended trade.
The ruling clears the way for the telecom giant to restart its merger engine, and could prompt a jumbo bond issue sized up to US$18bn, two investors said.
Also, the ruling may spur other companies to pursue mergers.
“There is no way to escape it,” Jason Shoup, senior portfolio manager at Legal & General Investment Management America, told IFR, referring to AT&T’s need for capital.
However, to get the deal done, AT&T might find itself having to pay up this time around as market volatility has increased, with average high-grade bond spreads widening by over 10bp.
The last time it tapped the capital markets in July, the company only had to pay investors 3.5bp-9bp in new issue concessions when it brought a US$22.5bn blockbuster bond deal for the proposed merger.
Around US$17bn of those bonds were taken out at 101 in April as part of a mandatory redemption because the merger had not been completed.
Market players say they’re expecting AT&T’s go-ahead to unleash further M&A activity down the road - much of which will be funded in the credit markets.
“CEOs and bankers are going to tout this decision as a sign of a more benign regulatory attitude towards consolidation,” David Knutson, head of credit research at Schroders, said.
And as the cycle continues to mature, companies are more likely to fund their acquisitions with debt, leaving credit investors at a further disadvantage, he said.
“We could see some pressure on spreads,” Knutson said.
AT&T’s bond deal could come sooner rather than later, as the company will want to get ahead of a growing M&A bond pipeline that includes Comcast, Shoup said.
Comcast said Tuesday that it is preparing to announce a bid for Fox’s assets on Wednesday if the AT&T/Time Warner deal is approved.
The US cable company may have to raise as much as US$60bn of debt to finance a potential deal for Fox.
The US stance on AT&T’s purchase of Time Warner has formed a big piece of the M&A puzzle when it comes to competition.
Other tie-ups in the regulatory queue include the US$26bn planned T-Mobile acquisition of rival Sprint and Disney’s US$66bn bid for Twenty-First Century Fox assets.
Another wild card could be whether Verizon, AT&T’s main competitor, is forced to respond to the acquisition with a mega M&A of its own, Janelle Woodward, global co-head of income at BMO Global Asset Management, said.
AT&T and Verizon are two of the largest corporate issuers in the index, each with a capital stack of well over US$100bn.
“The question then becomes how investors might look at the composition of the benchmark in terms of scaling risk and exposure,” Woodward said, referring to BAML high-grade corporate index. “How much absolute risk level do you want for any one issuer?”