First Look: How to Evaluate AT&T After the DirecTV Acquisition

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AT&T Inc. (NYSE: T) has seen its share of ups and downs in the world of telecom and dividends, but the pending DirecTV (NASDAQ: DTV) acquisition could be a game-changing event. The new cash flow is expected to support dividend growth, and now Wells Fargo has taken a stab at how to evaluate AT&T on a post-merger basis.

First, Wells Fargo’s Jennifer Fritzsche has an Outperform rating and a valuation range of $36 to $38 on the shares. After receiving many customer inquiries, the firm has decided to introduce its first pro forma outlook for the combined AT&T-DirecTV.

24/7 Wall St. would remind readers that most analysts and brokerage firms have not yet issued a post-merger outlook and target on earnings estimates for 2016 and 2017. AT&T has yet to give any more formal numbers than its original projections from 2014. Also, Wells Fargo is close to 10% higher than most analyst expectations.

Wells Fargo also said that it is not formally changing its estimates until the close of the merger. The firm also admits that there are many moving parts, so the pro forma figures may change ahead.

Wells Fargo believes that AT&T should see a meaningful improvement in its payout ratios, with earnings per share expected to grow in 2016 in a mid to high single-digit range, and with a path to deleverage in the years following the close of the deal.

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Some basic assumptions are that AT&T will issue 988 million additional AT&T shares as the equity portion of the deal, with a blended weighted average interest expense of 4.2% (including the recent $17.5 billion in debt raised in April). DirecTV’s capital expenditure figure of about $3 billion is kept static, and Wells Fargo is spreading the $2.5 billion in annual synergies target out equally over AT&T’s three-year target. The last assumption is that this merger will close on June 30, 2015.