January 5, 2018

Breakingviews: Verizon Will Be One of 2018s Few Mega Dealmakers

by Breakingviews.

Dealmakers are no longer living large. In 2015, there were more than 60 mergers and acquisitions announced globally worth at least $10 billion. Combined, they accounted for over a third of total M&A volume, according to Thomson Reuters data. By 2017, the trend had reversed. Expect an even shorter list of mega-mergers in 2018, but look for U.S. telecoms titan Verizon’s name to be on it.

By the time CVS Health unveiled its $77 billion plan to buy Aetna in December, the number of 11-digit takeovers in 2017 had halved from the record set two years ago. Their total value also had shrunk from nearly $1.5 trillion to about $700 billion. That’s despite the steady increase in market capitalizations and available cash that combine to make such transactions theoretically possible.

High valuations, erratic signals on U.S. tax and trade policy, and stronger pushback from trustbusters all conspired to restrain chief executives’ more animalistic spirits. Greater clarity on corporate tax rates could start to change some thinking, but with the S&P 500 index in early December trading at over 18 times earnings, more than 25 percent above its 10-year average, according to Datastream, it could still be hard to pull the trigger on a sizeable acquisition.

Verizon is one company that may not have the luxury of time, however. Growth has been tough to come by and consumers are shaking the ground more strongly under the media and telecom industries. Acquisitions of internet has-beens AOL and Yahoo hardly qualify as game-changers for a $210 billion company.

It sniffed around Twenty-First Century Fox, but regulatory resistance to combining wireless and programming power seems to be rising. Regulators sued in November to block AT&T’s acquisition of Time Warner, the owner of CNN and HBO. Instead, Verizon boss Lowell McAdam might be wiser to stick closer to home and consider buying satellite operator Dish Network. It would come with a $45 billion price tag, after factoring in net debt and a 30 percent premium. Even though McAdam has rejected such a combination before, it would help resolve a serious spectrum shortfall at Verizon identified by New Street analysts.

Financially, it could be a stretch. For one thing, the Dish enterprise trades at twice the multiple of expected EBITDA for the next 12 months as Verizon. And even if it could wring out the equivalent of 9 percent of the target’s operating costs, as AT&T said it would at Dish rival DirecTV, Verizon’s implied return on investment would be just 4 percent, according to Breakingviews calculations. Nevertheless, McAdam could buck the M&A trend because the rapid upheaval in his industry is such a big deal.


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