Tech by VICE

AT&T Set to Rack Up Massive Debt as Time Warner CEO Hits the Jackpot

If the deal goes through, AT&T will be saddled with a gargantuan amount of debt, as much as $200 billion or more.

by Sam Gustin
Oct 24 2016, 8:37pm

Image: Bloomberg/Getty

AT&T's proposed $85 billion merger with Time Warner may or may not be approved by federal regulators. Already, public interest groups and politicians alike are sounding the alarm about potential harms to consumers.

But if the deal goes through, two things are certain: First, AT&T will be saddled with a gargantuan amount of debt, as much as $200 billion or more, including the telecom titan's current pension obligations for employees. Second, Time Warner CEO Jeff Bewkes is poised to walk away from the deal with more than $300 million, if he sticks around to see the merger through.

These numbers are staggering, and difficult to put into perspective. So let's break them down.

AT&T currently holds approximately $125 billion in gross debt on its balance sheet, BTIG Wall Street analyst Walt Piecyk told Motherboard. As part of the merger, AT&T would assume approximately $25 billion in debt that's on Time Warner's balance sheet. In order to complete the merger, AT&T would take on an additional $40 billion in debt from Wall Street investment banks for the cash portion of the transaction.

Add to that approximately $45 billion in unfunded pension and post-retirement benefits for the telecom titan's workers, and you're looking at well north of $200 billion in total post-deal liabilities, according to Piecyk.

What does this mean for you and me?

Well, for one thing, AT&T needs to pay interest on all of this debt. The telecom titan should also ultimately try to pay down its debt balance over time if it wants to maintain a decent credit rating. Moody's Investors Service has twice downgraded AT&T's credit rating since January 2013, according to The Wall Street Journal. The company's credit rating now ranks at the third-lowest investment grade notch.

One way for AT&T to fund the interest payments on this huge pile of debt (forget about reducing the balance) would be to raise prices for consumers, according to S. Derek Turner, research director at DC-based public interest group Free Press.

"Given its new reach into American's lives, there are many ways it could go about recovering the inflated costs of this merger," Turner told Motherboard. "AT&T could hike prices in its consumer product markets like broadband where it faces little competition."

"It could also ramp up the prices it charges other cable distributors to carry channels like CNN, a bill that will be passed along to cable TV customers," Turner added. "Businesses that have no option other than AT&T for dedicated telecom services could also be squeezed for more revenue, increases that will ultimately trickle back down to consumers."

In a corporate press release announcing the deal, AT&T said it "expects to continue to maintain a strong balance sheet following the transaction close and is committed to maintaining strong investment-grade credit metrics."

Meanwhile, Time Warner CEO Jeff Bewkes is looking at an ultimate payout of more than $300 million, if he sticks around to see the deal through, according to The Wall Street Journal:

Time Warner doesn't have so-called golden parachute payments for executives if they are dismissed as part of an acquisition. Instead, Mr. Bewkes would get almost $24 million in options and other benefits like the maintenance of his life-insurance plan. Plus, he owns about 658,000 shares of Time Warner, which are valued by AT&T's cash-and-stock offer at about $71 million. Mr. Bewkes also held about 4.4 million options as of February, amassed over time as part of his annual compensation, which, if exercised today, would be worth more than $300 million, according to regulatory filings.

Rich Greenfield, Piecyk's BTIG colleague, and one of the leading media and technology analysts on Wall Street, acknowledged that Bewkes' potential payout would be massive. But, he told Motherboard, Bewkes has earned it, because he's delivered a superb outcome for Time Warner shareholders.

"This is a fantastic deal for Time Warner shareholders," said Greenfield, noting that Bewkes turned down a buyout offer from Rupert Murdoch at $85 per share in 2014. Now, he's getting $107.50 per share from AT&T, a 30 percent premium over Time Warner's stock price as recently as last week.

"I don't think that shareholders care that much that Bewkes is getting rich, because they're getting rich also," Greenfield said. "This is a brilliant outcome for Time Warner shareholders."