AT&T Plan to Cut Time Warner Deal Cost Said to Get Some Pushback

(Bloomberg) -- AT&T Inc.'s effort to reduce borrowing costs associated with its planned acquisition of Time Warner Inc. is meeting some resistance from the telecom provider's bondholders.

The company's proposals include two options: an offer to buy back from investors some bonds used to fund the acquisition, or swap them into new securities. Both would cost the company a small premium but substantially less than the one percentage point they will otherwise have to pay, that could cost them a potential $1 billion, when interest is included.

While a significant number of investors could accept either, at least four money managers who are among the biggest holders said Thursday they were poised to reject both. Two others said they were ready to do the exchange. All asked not to be identified discussing private deliberations.

AT&T issued the bonds last year to fund its acquisition of Time Warner with the condition that if the deal wasn't sewn up by April 22, the company would have to buy back the bonds at 101 percent of face value.

Avoid Costs

That, including interest accrued since the debt's issue, would cost AT&T as much as $1 billion, according to Bloomberg Intelligence analyst Stephen Flynn. The company is seeking to avoid that cost by buying back the debt now or having bondholders swap into new securities of the same coupon and maturity but different terms.

Representatives for Dallas-based AT&T and New York-based Time Warner declined to comment.

The cash offer, which expired at 5 p.m. on Thursday in New York, would give holders of some bonds an extra 0.25 cents on the dollar to tender their securities. The buyback offer relates to a subset of the debt with the problematic term known as a special mandatory redemption, or SMR clause. It's in particular bonds maturing in 2023, 2037, 2050 and 2058 with $12.7 billion outstanding.

Under the second part of AT&T's effort to curb costs, the company would swap that SMR provision out of those securities in an exchange deal for the same fee. That's to AT&T's benefit because the clause requires it to buyback bonds at 101 cents, a touch higher than where they trade now.

Exchange Offer

In order to pass the exchange offer, AT&T must receive consent from investors representing at least $300 million of the outstanding value on the bonds due in 2037, 2050 and 2058, AT&T said in a statement last week. The bonds due in 2023 do not have a minimum condition requirement. There's also no stated threshold for the cash offer to pass, according to a separate statement.

Some bondholders, such as pension funds and insurers, would have had the incentive to do the exchange because they need longer-dated assets to match their liabilities. All the bonds in question were sold in July for the Time Warner deal. The April 22 deadline is written into the bond documents, but the companies later agreed to push the deadline for the merger back to June 21.

The risk of missing the acquisition deadline seems high after the U.S. Justice Department sued to block the $85 billion combination on antitrust grounds, arguing the deal will raise prices for pay TV subscribers. The trial is in process now.

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Sally Bakewell

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