Over the weekend, AT&T (T) and DirecTV (DTV) entered into a definitive agreement in which AT&T will acquire DirecTV in a cash-and-stock transaction for $95 per share on the basis of AT&T’s Friday closing price. In light of this announcement, we plan to remove DirecTV from the Best Ideas portfolio early next week, recording a significant gain from the $55 per share cost basis in the portfolio. We trust you are very happy with this news. Though some investors will choose to hang onto shares in the event that AT&T’s equity increases before DirecTV is de-listed from the exchange (thereby driving DirecTV’s shares higher), we’re comfortable taking the hefty per-share profit on the pay-TV provider very soon and not waiting for closure (expected within 12 months). We do not want to take on the risk that regulators could eventually block the transaction, which would inevitably have a negative pricing impact on DirecTV’s shares. Though the tie-up will be accretive to AT&T’s free cash flow per share and on an adjusted earnings per share basis within the first year, we’re reiterating our negative long-term opinion of AT&T’s dividend growth prospects given its troubled , which considers its massive debt load.
>> Expect an email transaction alert early this week regarding the position in DirecTV in the Best Ideas portfolio.
Cost synergies of the deal will be large, as expected, and will likely exceed a $1.6 billion annual run rate by year three after closing. We don’t expect to change our fair value estimate of AT&T immediately as a result of the transaction, as AT&T is essentially buying DirecTV at fair value (a value-neutral transaction). We’d like to see how deal integration progresses before rewarding the combined entity an incremental $16 billion in present equity value ($1.6 billion/0.1; annualized synergies/discount rate) on the basis of the $1.6 annualized expected cost savings. For perspective, if we give AT&T full credit for the present value of the future expected synergy stream associated with the transaction (the value of the transaction to AT&T), our fair value estimate of AT&T would be revised upward to $41 [($222.3 billion + $16 billion)/5.82 million], which is still within the firm’s existing pre-deal fair value range (which considers upside to $46 at the high end). We plan to update our report on DirecTV following Monday’s trading action and will be retiring its rating of 9 on the Valuentum Buying Index at that time. We would expect Dish Network (DISH) to be more active on the deal front as a result of the consummation of this transaction.
In other news over the weekend, Pfizer (PFE) upped its bid for AstraZeneca (AZN) for the third time. According to reports, the drug maker increased its stock-and-cash offer to roughly $119 billion (or roughly $92 per share), now materially higher than we value shares on a standalone basis. Clearly, we think Pfizer is paying way too much for growth on the basis of our fair value estimate of AstraZeneca. Though AstraZeneca boasts an impressive oncology pipeline and has solid long-term prospects, the deal would be value-destructive to Pfizer shareholders by almost every measure. In the event that Pfizer’s proposal expires at 5pm London time on Monday, May 26, and AstraZeneca does not accept or counter before the deadline for any number of reasons (there are also political roadblocks regarding potential job cuts on both sides of the Atlantic), we expect Pfizer to walk away from the transaction, perhaps indefinitely. Under that scenario, we’d likely see a ‘relief’ rally in Pfizer’s shares and AstraZeneca’s equity tumble to a more reasonable pre-Pfizer-bid price (shares of AstraZeneca closed under $70 as recently as April 25). At this juncture, we’re not interested in participating in either Pfizer’s or AstraZeneca’s shares, given the likelihood of large price swings in either direction in the coming weeks. We plan to update our reports on both firms shortly after the deadline, as we still believe a meaningful probability exists that the transaction will not be completed. In any case, we think the Pfizer-AstraZeneca saga brings to light Pfizer’s anxiousness to put non-US-domiciled cash to work at almost any price, which is never good. Holders of Pfizer’s stock should take notice.
As we had speculated, media outlets reported over the weekend that Siemens is working on a formal asset-swap offer to trump General Electric’s (GE) bid for Alstom’s power business. Reports suggest that Siemens’ offer could come as early as this week, and we would fully expect the offer to catch favor with the French government, which would like to keep jobs and retain key assets related to national energy independence in the country—two promises Siemens has made. At this time, we’re reiterating our opinion that we like the GE-Alstom combination as currently structured in GE’s offer (click here). However, we acknowledge the likelihood that the news over the weekend means GE may eventually have to revise its current offer higher. We would be against GE materially upping its offer solely for political reasons, but if additional deal synergies can be identified, a higher offer could make sense.
Still, we think it’s important to note that, for GE, the Alstom deal is a nice-to-have transaction, not a must-win acquisition. The company could simply walk away from the transaction (if Siemens ties the knot instead) and receive a break-up fee equal to 1.5% of the proposed purchase price. Under this scenario, we’d like shares of GE all the same. On an organic basis, GE’s industrial backlog has never been stronger, and we like that it continues to diversify away from its riskier and relatively opaque financial operations. GE’s executive suite is focused on the right return metrics, in our view, and we have confidence that the team will walk away from the transaction in the event the deal characteristics become value-destructive to GE shareholders. We’re monitoring new developments closely. GE remains a holding in both the Best Ideas portfolio and Dividend Growth portfolio.