Dear Mr. Berko: AT&T is my largest position. I started buying the stock at $24 in the summer of 2009. I own 6,783 shares, and my dividends are reinvested as you recommended. I’m hearing bad things about the buyout of Time Warner. For example, I hear that the debt is too high and that stock dilution will limit earnings and dividend growth. Others say that Time Warner and AT&T combined will be stronger and that revenues, earnings and dividends will grow faster than they have in the past. My stockbroker is very negative on the merger and wants me to sell all my AT&T shares and buy Verizon. He is recommending that all his clients who own AT&T sell their shares. He is telling them and me that the buyout costs will weaken the balance sheet and income statement and that many mutual funds will have to sell hundreds of millions of shares, dropping the price back to the $25 level.
At 72, I’m very nervous about this, and I beg you for your advice. Please tell me whether I should hold AT&T or sell it and buy Verizon. Please answer as fast as you can.
— C.L., Moline, Ill.
Dear C.L.: Early last August, AT&T’s (T-$36.90) CEO, Randy Stephenson, decided to stop by the offices of Time Warner’s (TWX-88) CEO, Jeff Bewkes, in New York. While Jeff’s chef served an epicurean lunch of salmon, caviar and Champagne, a deal was born; these two industry titans were planning to conquer the broadcast media universe. After lunch, Randy left the TWX offices with visions of sugarplums that included TBS, TNT, Cartoon Network, HBO, CNN, Warner Bros. and the growing DC cinematic universe, as well as the Harry Potter franchise and other delicious media properties that could make T a serious rival for Disney (DIS-$93).
The combination of T and TWX creates a group of assets with some of the highest sales, earnings and free cash flow numbers in the world. The new company would have combined revenues of about $191 billion, combined earnings of $18.4 billion and a free cash flow of $20.2 billion. This $85.4 billion deal (cash and stock to buy TWX at $107.50 a share) would create a conglomerate that produces content and then distributes this content, uniting the millions of AT&T’s pay-TV and wireless customers with TWX’s huge cache of media content. It’s a no-brainer — maybe!
