Late Saturday, Time Warner (TWX) agreed to the buyout offer from AT&T (T) that values the company for $107.50. The terms of the deal are as follows:
Time Warner shareholders will receive $107.50 per share under the terms of the merger, comprised of $53.75 per share in cash and $53.75 per share in AT&T stock. The stock portion will be subject to a collar such that Time Warner shareholders will receive 1.437 AT&T shares if AT&T’s average stock price is below $37.411 at closing and 1.3 AT&T shares if AT&T’s average stock price is above $41.349 at closing.
With AT&T closing the week at $37.49, the stock barely fits inside the downside collar now. Any dip below $37.411 on Monday and the value of the deal slips as well. The good news though is that 50% of the value is in cash limiting any downside.
The deal only expects $1 billion in annual run rate synergies within 3 years of closing. The DirecTV purchase targeted synergies of $1.6 billion before raising the estimate to $2.5 billion. This suggests some upside to the synergy level, but as well highlights the fewer opportunities to reduce costs with the merging of distribution and content.
The deal is accretive, but Time Warner likely trades around $100 due to regulatory risk and the possibility that AT&T breaks the collar in initial trading.
Disclosure: Long TWX