Randall Stephenson, AT&T’s chairman-CEO, summoned all of his folksy Oklahoma earnestness as he made an enthusiastic pitch to Wall Street analysts about the telephone company’s bold efforts to transform itself into a multimedia powerhouse. It was late November, less than six months after AT&T had wrapped up its $85 billion acquisition of Time Warner. But before Stephenson could wax poetic about his plans to revitalize HBO, Warner Bros. or other newly acquired AT&T subsidiaries, he felt compelled to address the elephant in the room.
“If you hear nothing else this afternoon, I want you to hear me on this,” Stephenson said at the company’s investor presentation in New York. “Our discretionary cash flow is going to go to one place. It’s going to be paying down debt.”
Stephenson had no choice but to try to appease those who are plenty anxious about the mountain of leverage AT&T has accrued in the past four years, not only from the Time Warner purchase but also from its $49 billion deal for DirecTV. The nut stands somewhere between $170 billion and $180 billion plus.
AT&T is not alone in seeing red-ink levels rise in an era of merger mania.
Comcast will have to shoulder $114.7 billion in debt, according to Moody’s, now that it has shelled out $40 billion to buy Sky — this after losing the bidding war with Disney for 21st Century Fox. Like Comcast, Disney is carrying more leverage than it has in more than a decade.
The task facing AT&T, Disney and Comcast is a daunting one, requiring deft corporate maneuvering to avert disaster. All three companies have made big bets that the only way to survive and thrive amid the digital disruption is to get bigger, and they’ve used debt, lots of it, to finance their empire building.
“If there’s an economic slowdown or interest rates continue to rise, I’m not sure these companies will look back and think that it was such a good idea to pile on the debt,” says Hal Vogel, CEO of Vogel Capital Management.
These media giants are scrambling to catch up with the market-shaking rise of Netflix. The streaming giant has also fueled its ascent on the back of cheap debt. Unlike the leveraged financing used by Comcast, Disney and Fox, much of the money Netflix has borrowed is of the junk bond variety. That means that the cost of servicing the debt will fluctuate more wildly if interest rates rise.
“It can be a very painful experience for companies that are carrying a big debt load,” says Schuyler Moore, a partner in the corporate entertainment department of Greenberg Glusker. “People lend money based on a company’s theoretical equity value, but if the stock gets hammered, that equity cushion deflates as well.”
The ballooning leverage only heightens the enormous stakes at play for the largest media companies. AT&T, Disney and Comcast are faced with reinventing large parts of their core businesses — to compete in the global streaming marketplace established by Netflix’s fast rise — at the same time they navigate the tricky process of integrating high-priced acquisitions into existing operations, with all the potential for culture clashes, turf wars and dysfunction that entails. The demands of meeting ambitious synergy targets and servicing a higher level of debt require that everything go right for these corporations in the next two years in order for the math to work.
“Certainly there’s a lot more leverage in the system than there was at the end of the last economic expansion cycle [in 2009],” says longtime media industry analyst Craig Moffett of MoffettNathanson. “That has to make you nervous if we’re indeed headed into a recession at some point.”
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