Morningstar equity analysts remain disappointed with AT&T’s (T) capital allocation decisions. The firm plans to acquire Time Warner (TWX) for $107.50 per share, a 35% premium to Time Warner’s share price before deal rumours surfaced and a 26% premium to our standalone fair value estimate for Time Warner. Based on our fair value estimate, AT&T is paying about $18 billion more for Time Warner than it is worth on a standalone basis, equal to $2.90 per AT&T share.
AT&T will fund half of the purchase price with its shares, which we believe the deal terms overvalue. As a result, the net loss of value to AT&T could be as low as $2 per share. As we’ve written previously, we are sceptical of the strategic benefits of combining content ownership and distribution. Thus, we will likely lower our AT&T fair value estimate to around $35 after sifting through the deal details and listening to the conference call discussing the merger on Monday morning.
AT&T also released third quarter results. The firm showed some progress in its effort to stem post-paid wireless and television customer losses, but not to an extent that would cause us to significantly change our long-term expectations. The firm lost 268,000 post-paid phone customers, better than the 383,000 lost a year ago, but still the eighth consecutive quarterly decline.
AT&T’s post-paid customers remain among the most loyal in the business, monthly churn declined to 1.05% from 1.16% a year ago. Like Verizon, however, the firm is struggling to attract new customers in the face of heavy promotional activity from Sprint and T-Mobile.
Within the television business, AT&T lost 31,000 net customers, less than half the number of a year ago. The Directv satellite business added 323,000 customers while the U-Verse segment shed 354,000. After a full year of operating Directv, we estimate AT&T is losing television customers at about the same pace as the industry, which continues to call the strategic benefits of the Directv acquisition into question, in our view.
