AT&T, Inc. (NYSE: T) is known to have Time Warner, Inc. (NYSE: TWX) in its sights as an acquisition target. AT&T stock price had hit new highs in August, but ever since has steadily declined. Currently, there has become some lower support in the mid-$36 price range, which is approximately 19% greater than the 52w low.
In contrast, Time Warner's PPS has steadily climbed as seen in the chart below.
AT&T is said to be offering $85b for Time Warner, which is a premium to the current market capitalization of nearly $67.62b. Time Warner shares continue to climb towards the projected buyout value.
AT&T will provide the total cost with nearly half in cash and another half in loans to complete the transaction. Seeing how cash reserves do not support this buyout, a second offering or some other form of dilution could take place for AT&T to raise the capital.
The M&A is in some contention and will be under review by the U.S. Senate Antitrust Subcommittee on December 7th, 2016.
Free Cash Flow (FCF) Yield
The FCF yield for both stocks at the 9mo mark of 2016 is decent. Each is greater than 4.5% yield when compared to their respective market capitalization.
In addition to AT&T's +6% FCF yield is their significant dividend yield of +5%. The company maintains a robust $5.89b in cash and equivalents on the balance sheet. The good valuation might be attributed to the nature of merger arbitrage. That is to say, as the buying company comes closer to acquiring their target, their stock price lowers due to factors including: (1) possible dilution of their shares in new offerings; (2) an increased goodwill expense when they pay a premium for the target company; and (3) increased debt. These activities support traders and short-selling strategies. It's possible that AT&T could become even more of a bargain as the M&A looms.
Free Cash Flow is tabulated by taking the value of the company's operating cash flow and subtracting from it the value of capital expenses. The yield is then formulated by dividing the result by either the market capital or enterprise value.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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