In what is setting up to be a scorching merger Monday, moments ago we got confirmation of news that had been leaked days in advance, namely that both the boards of AT&T and DirecTV had agreed to a transaction whereby AT&T would buy DirecTV in the latest chapter of what we dubbed several months ago the "M&A bubble", for $95/share in a $67.1 billion transaction including debt, consisting of $95/share in stock, $28.50/share in cash. According to the public announcement, the DirecTV purchase represents a 7.7x multiple of its 2014E EBITDA.
The terms of the transaction from the press release [6]:
DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.
This purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DIRECTV’s net debt. This transaction implies an adjusted enterprise value multiple of 7.7 times DIRECTV’s 2014 estimated EBITDA. Post-transaction, DIRECTV shareholders will own between 14.5% and 15.8% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
AT&T intends to finance the cash portion of the transaction through a combination of cash on hand, sale of non-core assets, committed financing facilities and opportunistic debt market transactions.
To facilitate the regulatory approval process in Latin America, AT&T intends to divest its interest in América Móvil. This includes 73 million publicly listed L shares and all of its AA shares. AT&T’s designees to the América Móvil Board of Directors will tender their resignations immediately to avoid even the appearance of any conflict.
Additionally, as the press release states, "AT&T expects the deal to be accretive on a free cash flow per share and adjusted EPS basis within the first 12 months after closing."
The combination provides significant opportunities for operating efficiencies. AT&T expects cost synergies to exceed $1.6 billion on an annual run rate basis by year three after closing. The expected synergies are primarily driven by increased scale in video.
Where will the upside come from:
The combination diversifies AT&T’s revenue mix and provides numerous growth opportunities as it dramatically increases video revenues, accelerates broadband growth and significantly expands revenues from outside the United States. Given the structure of this transaction, which includes AT&T stock consideration as part of the deal and the monetization of non-core assets, AT&T expects to continue to maintain the strongest balance sheet in the industry following the transaction close.
AT&T’s 2014 guidance for the company remains largely unchanged. However, the company’s intention is to divest its interest in América Móvil, which will result in an approximately $0.05 reduction in EPS, as the América Móvil investment will no longer be accounted for under the equity method. Adjusted 2014 EPS growth is now expected to come in at the low-end of the company’s mid-single digit guidance.
As always, there is risk the FCC will nix the transaction which forms a telecom behemoth with over $100 billion in combined debt:
The merger is subject to approval by DIRECTV shareholders and review by the U.S. Federal Communications Commission, U.S. Department of Justice, a few U.S. states and some Latin American countries. The transaction is expected to close within approximately 12 months.
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Almost concurrently with the AT&T announcement, Pfizer also did what many expected it to do, when it announced that as part of its "final offer" it would boost its proposed purchase price for AstraZeneca by 15%, representing a total transaction value of about $119 billion, or about 15.6x multiple of AZN's $7.6 billion in projected 2014 EBITDA, which would represent the largest pharma deal in more than a decade.
From the press release:
- AstraZeneca shareholders would receive, for each AstraZeneca share, 1.747 shares in the combined entity and 2,476 pence in cash, representing an indicative value of £55.00
- Substantial increase of approximately 15% over the current value of Pfizer's 2 May proposal
- Cash consideration increased by £8.78 per AstraZeneca share, or approximately £11.3 billion ($19.0 billion)
- Cash component increased as a proportion of the total consideration from approximately 33% to 45%
- Pfizer calls on supportive AstraZeneca shareholders to urge the AstraZeneca board to begin substantive engagement with Pfizer and extend the period for such talks prior to the 26 May deadline for making an offer
Most importantly:
- Pfizer will not make a hostile offer directly to AstraZeneca shareholders and will only proceed with an offer with the recommendation of the AstraZeneca board
Indeed, as Bloomberg clarifies, citing the Pfizer CEO, "Following a conversation with AstraZeneca earlier today, we do not believe that the AstraZeneca board is currently prepared to recommend a deal at a reasonable price,” Pfizer CEO Ian Read says in e-mailed statement.
- Pfizer sent a letter on May 16 to AstraZeneca Chairman Leif Johansson offering GBP53.50/shr, or 1.845 shares in the combined co., 2,157p/AstraZeneca shr
- AZN said its board thought that proposal “substantially” undervalued co., said it’s not prepared to accept a price close to Pfizer’s £53.50 proposal
- Pfizer confirms that it won’t make a hostile offer directly to AstraZeneca holders, will only proceed with offer with recommendation of AstraZeneca board
And while Pfizer said the deal expires in 8 days, on May 26, BBC's Mark Kleiman makes it clear that a deal is hardly assured even despite what appears now to be a 15x purchase multiple:
Pfizer urges AZ investors to put pressure on board to engage. May be tricky for AZ directors to engage though given rejection of £53.50.
— Mark Kleinman (@MarkKleinmanSky) May 18, 2014 [7]
Importantly, Pfizer says it will not make a hostile bid for AZ - means this could all be over relatively swiftly if UK company says no.
— Mark Kleinman (@MarkKleinmanSky) May 18, 2014 [8]
If £53.50 "substantially undervalued" AZ, does £55 represent basis for serious engagement? That's the question AZ will have to answer tmrw.
— Mark Kleinman (@MarkKleinmanSky) May 18, 2014 [9]
Pfizer's appeal to AZ shareholders makes it a quasi-hostile bid - full hostile would be too risky given regulatory and tax complexities.
— Mark Kleinman (@MarkKleinmanSky) May 18, 2014 [10]
That is of course if a "retroactive" law about to be introduced by Carl Levin to kill tax "inversion" deals, doesn't scuttle the deal in the first place. The NYT reminds [11]:
By acquiring AstraZeneca, Pfizer would be able to conduct a so-called inversion, redomiciling in Britain, where it would pay a lower tax rate, potentially saving $1 billion or more a year.
Pfizer is the largest and best-know company to try such a move, and lawmakers in Washington have responded by preparing legislation that would curtail inversions. Senator Carl Levin, Democrat of Michigan, is expected to introduce his bill this week.
In any case, as the scramble to take advantage of ever lower rates accelerates (because oddly enough rates are not rising for whatever reason, despite the so-called recovery), even if the AZN deal falls through, expect many more M&A deal to take place in the coming weeks and months as the final traces of the liqidity bubble manifest themselves in an M&A blowoff top now that the buyback frenzy appears to be fading and acquisitions are the last bastion before companies finally have to allocate capital to that one most hated of activities, if only by shareholder activists, capex.