T AT&T Inc

By Drew FitzGerald and Sam Goldfarb 

WASHINGTON -- Even if a federal judge sides with AT&T Inc. in its fight to take over Time Warner Inc. for $85 billion, victory won't have come cheap.

AT&T spent $1.1 billion last year on debt interest and fees tied to the proposed merger, plus $214 million on related integration costs. The first quarter added another $67 million of integration costs. Time Warner said it spent $279 million on merger costs in 2017 and another $146 million through March.

Those figures don't include the full cost of staffing the trial, which kicked off in March after the Justice Department sued late last year to block it, arguing the combination would hurt pay-TV competition. The companies denied the government's allegations and added attorneys from at least six white-shoe law firms to defend the tie-up in one of the most-watched antitrust cases in decades.

The meter has kept running for AT&T over the past five weeks at the E. Barrett Prettyman federal courthouse in Washington. On most weekdays, a convoy of Chevy Suburbans rumbles across town from the Four Seasons and other hotels to let off about a dozen attorneys at the courthouse, where they join another dozen or so colleagues already inside. For busy days, company lawyers watching but not arguing the case rely on local residents paid $15 an hour to save them a spot in line overnight.

The team of newly hired and in-house lawyers have filled the well of judge Richard Leon's courtroom, the pews behind it and, during crowded sessions, an overflow room next door. AT&T staffs a separate Washington "legal operations center" nearby while court is in session.

Executives have done little to hide their discomfort with the wait. They argue that the companies could save money by merging operations sooner, helping drive down prices in the pay-TV market.

"The only lack of competition as a result of this transaction has been the delay of getting it to the marketplace," AT&T Chairman and Chief Executive Randall Stephenson testified earlier this month. "We're just anxious to get moving and get this transaction put together so we can begin to bring these consumer benefits to play."

The added interest payments and legal fees only raise the stakes for two companies betting on the marriage of video content and distribution to juice their earnings as their core businesses face pressure from "cord-cutters".

Shares of both AT&T and Time Warner fell Thursday after their latest quarterly results. AT&T reported fewer satellite-TV customers, while Time Warner reported that higher programming costs weighed on operating income at HBO and Turner.

AT&T's original agreement, struck in October 2016, didn't plan for a merger review lasting more than a year-and-a-half.

AT&T issued about $30 billion of bonds last summer to fund the purchase. Most of that debt included language requiring the company to buy the bonds back at a premium of 101 cents on the dollar if the deal didn't close by April 22. That date came and went, likely costing AT&T around $200 million in premiums, said Mary Pollock, a senior analyst at the research firm CreditSights.

The redemptions still help by keeping the company from having to pay interest expense on debt that it doesn't need as long as it hasn't closed the Time Warner deal, Ms. Pollock added. AT&T had nearly $49 billion of cash at the end of the first quarter, giving it more than enough to buy back the debt.

If it is allowed to close the Time Warner deal, AT&T likely will need to issue a second round of bonds that could pay higher interest rates than the original debt. The average yield on investment-grade corporate bonds has increased to 3.97% from 3.14% since AT&T sold dollar-denominated bonds to fund the deal last July, according to Bloomberg Barclays data.

Regardless of whether it prevails in court, the deal's costs will likely saddle AT&T with added expenses for several quarters, according to Vijay Jayant, an analyst for Evercore ISI. Then again, he said, "given the size of the transaction, this is a drop in the bucket."

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

April 26, 2018 15:34 ET (19:34 GMT)

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