We’ll start with something simple.
Let’s say you bought a condo unit by paying the seller $81,000 and also assuming responsibility for paying a $23,000 mortgage on the property. How much did the unit cost you?
Did you say $81,000? Wrong! To the back of the class! Your cost is $104,000 — what you paid the owner plus the mortgage for which you’re now on the hook.
That’s why calling the Time Warner sale an $81 billion deal — the value of the cash and stock that Time Warner shareholders got from AT&T — is misleading.
How so? Because in addition to paying Time Warner shareholders (who included me) for their stock, AT&T also took over responsibility for about $23 billion of Time Warner debt.
A brief aside — that $23 billion and the other numbers in this column are based on my reading of various documents, some of which AT&T helped me find. But AT&T wouldn’t discuss my math or my conclusions because it’s scheduled to make an earnings announcement on Tuesday and is now in a so-called quiet period.
Back to the main event. When you include the debt that AT&T is assuming, as you should, buying Time Warner cost AT&T about $104 billion, not the $81 billion or $85.4 billion that you see in most articles.
In the Oct. 22, 2016, press release announcing the deal, AT&T said it was paying Time Warner holders $85.4 billion of cash and stock. And to its credit — no pun intended — AT&T said its total cost would be $108.4 billion. But these days, you see little mention of the assumed debt in discussions of the deal.
Now, you ask, how did the $85.4 billion that AT&T said it was paying in 2016 become $81 billion in 2018?
A good question. The answer involves more fun with numbers. And some fine print.
Time Warner holders were supposed to get a total of $107.50 a share — $53.75 of cash and $53.75 of AT&T stock.
But the $53.75 of stock wasn’t guaranteed. It was subject to what’s called a collar, under which AT&T would issue no fewer than 1.3 of its shares per Time Warner share if its stock was above $41.349 when the deal closed and no more than 1.437 shares if its stock fell below $37.411.
If AT&T stock was in between those numbers, Time Warner holders would get AT&T shares worth $53.75.
Oops. The collar turned into a dog collar, because AT&T way underperformed the overall market.
AT&T traded at $37.49 the last trading day before the deal was announced, but at only $32.52 on June 14. That 13 percent drop was more than 40 percentage points below the performance of the benchmark Standard & Poor’s 500-stock index, which rose by 30 percent during the period. Ouch.
Because AT&T’s price was way below the bottom of the collar, Time Warner holders got only about $46.70 of AT&T stock rather than $53.75. In all, Time Warner holders got a total of about $100.45 a share rather than the stated $107.50.
But AT&T shareholders shouldn’t run out and celebrate their company having saved $5 billion or so.
Why? Because AT&T issued about 113 million more shares (by my estimate) to Time Warner holders than it would have issued had its stock price been at the top of the collar. That dilutes existing AT&T holders’ stake in the combined enterprise by about 1.5 percent, reducing the economic value of their piece of the company.
What’s more, those extra shares add about $225 million to AT&T’s annual dividend payout at its current rate of $2 a year. That’s money the company can’t use for other things.
Okay. No matter how many numbers we play with, there’s no way to tell if buying Time Warner will be good for AT&T holders over the long term.
I have serious doubts, given what I’ve seen happen in the megadeals I’ve watched in almost 50 years of writing about business.
And I wonder if AT&T will sell CNN to a Trump-toady outfit like Fox for political reasons. I think that would be bad for our society, although I’m sure many of you disagree.
In June, I disclosed that Time Warner stock, part of the compensation I got when Time Warner owned my then-employer Fortune magazine, was about 2 percent of my portfolio. No more. I’ve sold all the AT&T stock I got, and thus have no financial stake in how the takeover works out.
But I’m going to keep an eye on developments. And who knows? One of these days, I may get another Fun With Numbers column out of it.