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.
AT&T’s payout ratio has been a continual focus, but this likely will change in a serious way. Wells Fargo expects roughly a 10 percentage point improvement in payout ratio, down to about 64% from a prior 74% in 2016. The pro forma estimate on free cash flow in 2016 is now projected to rise to $2.95 from $2.58, and that suggests that AT&T can grow earnings per share by roughly 7% in 2016.

The firm also expects that AT&T will end 2015 with roughly $121 billion in net debt with a leverage ratio of 2.6 before deleveraging efforts begin to take effect — with that leverage dropping to 2.2 times by the end of 2016.

Wells Fargo’s $36.00 to $38.00 valuation range assumes 14.1 to 14.9 times 2015 adjusted earnings per share estimate.

Still, Wells Fargo is keeping a back door open in case some of the numbers are off. The firm further warned that there is an expected dilution to come from AT&T’s two recent Mexican acquisitions of NII Holdings and Iusacell.

Risks to this evaluation include an increased exposure to difficult enterprise customers, the weakening economy, the large wireline footprint that reduces the wireless benefit, and a moderately aggressive broadband strategy.

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AT&T shares were up almost 2% at $35.00 in midday Wednesday trading. Its 52-week range is $32.07 to $37.48, and the consensus analyst price target is $34.30. The highest analyst price target for AT&T is still up at $40.00.

24/7 Wall St. would like to make at least one reminder here for short-term and long-term investors alike. This warning is not about the Wells Fargo call specifically, but about the coming waves of analyst calls in the weeks ahead. Analysts often have a very hard time getting their earnings, revenues and other expectations modeled accurately for months or quarters after companies make game-changing or transformative acquisitions. With market caps of $181 billion for AT&T and $46 billion for DirecTV, this leaves the door open for serious disclosures from analysts ahead that their models were far different than what really comes to pass after the real costs get factored in.

Also, AT&T said at the time of the deal announcement that DirecTV shareholders would receive $95.00 per share, consisting of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion was shown to be collared:

DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.

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Some basic additional comments from both sides of this merger in 2014 were as follows:

• Nationwide mobile and video networks and broadband combined to cover 70 million customer locations with broadband expansion
• Significant expansion opportunity in Latin America’s pay-TV market
• Deal to be accretive within 12 months after close on free cash flow per share and adjusted earnings per share basis
• Cost synergies expected to exceed a $1.6 billion annual run rate by the third year after the deal closes
• Improved revenue mix and significantly expanding ex-U.S. revenues
• Commitment to expand and enhance broadband to 15 million customer locations, primarily in rural areas
• A continued commitment to net neutrality
• Stand-alone broadband offerings for customers who only want a broadband service, allowing them to consume video through an over-the-top service like Netflix or Hulu

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