Verizon, AT&T Morphing Through Mega-Mergers

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By: R. Scott Raynovich

It's been a busy last couple of years of M&A activity for the large American carriers AT&T and Verizon -- and it looks as if it may not be over.

AT&T in 2015 acquired DirectTV for about $50 billion, taking on billions more in debt to do the deal. AT&T is also merging with Time Warner (pending government approval). Verizon has bought other telecom and media assets, including AOL and Yahoo. Both have been investing billions in additional wireless spectrum, with AT&T recently bidding $1.6 billion for Straight Path, a holder of spectrum assets. And now the Verizon CEO has floated the idea of a tie-up with Comcast, according to Bloomberg.

The scale of these changes is unprecedented. It looks as if the old "phone companies" are trying to become distribution-and-media giants, financed by hundreds of billions in debt. As I wrote in 2015, both Verizon and AT&T added more than $100 billion in debt to finance new acquisitions of companies, assets, and spectrum.

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The scale and risk appear to be underestimated, especially given the fact that Verizon and AT&T have little experience in media. For investors, this marks a significant shift in what these large telecommunications conglomerates look like. Clearly, there are doubts. Verizon's stock price has been flat for the past four years. AT&T's stock is only up about $5 (14 percent) since the 2013 level, during a time in which the S&P has risen 30 percent.

The amount of leverage and debt involved to finance these transactions is astounding. AT&T is now carrying $128 billion in debt, with a market cap of $247 billion. Its total debt/equity ratio, a measure of leverage, is 102, according to Thomson Reuters data. Verizon has a total debt of $108 billion, with a market cap of $200 billion and a debt/equity ratio of 450.

Optimists will point out that these companies are financing their leveraged acquisitions with plenty of cashflow. Verizon has about $23 billion in annual cashflow and AT&T has about $40 billion, on a trailing twelve months basis. But more large acquisitions are likely to increase investor questions about the strategy -- and weigh on the balance sheet and stock prices.