It has been known for decades that price wars are great for consumers and horrible for companies involved. That is particularly true for the companies that dominated for years. It turns out that the four-way wireless price war is no exception to the rule when it comes to the wide world of telecom.

Merrill Lynch had been a holdout bull for AT&T Inc. (NYSE: T) for some time. That ended on July 13, 2017, and the call isn’t just about a price war. Analyst David Barden and his telecom team downgraded AT&T to Neutral from Buy, slashing the price target to $39 from $46. The team also removed AT&T from the firm’s prized US 1 list of top Buy-rated stocks.

While much of the outside concern has been around the price wars, the impetus for this downgrade was actually ahead of the $40 billion stock issuance that will be used to acquire Time Warner Inc. (NYSE: TWX). In short, about 20% new shares will be issued.

This has brought up issues for the dividend, but there are also some fuzzy issues brought up about real merger synergies. AT&T has assumed that it can reduce Time Warner’s operating costs by 5%, about $1 billion, over three years. Merrill Lynch gives this a net present value of synergies at about $8.7 billion, using a 10% discount rate.

The team said:

Our rating change is based on lower positive catalyst visibility (corporate tax reform) and potential technical headwinds to emerge related to the Time Warner merger. We see few reasons the deal would fail to close as expected. Reports peg the deal closing as soon as September while AT&T remains confident of a close in the second half. The overhang of $40 billion in new equity issuance associated with the closing of the Time Warner acquisition and further tightening of the deal spread will increasingly weigh on AT&T’s stock making outperformance challenging absent some other catalyst, in our view.

Merrill Lynch did note that there are some positive issues out there. The firm also warned that those are external to AT&T for the time being. The expectation for corporate tax reform was the most promising and positive potential catalyst, but the market has been ratcheting down those expectations.

One potential benefit would be further industry consolidation in wireless, specifically noting the ongoing speculation of Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NASDAQ: TMUS). This would lead to a less intense competitive environment. Merrill Lynch further noted that voice, video and broadband metrics are likely to have been seasonally challenged in the second quarter, with AT&T likely having lost share in each category. That video category will be a blow, considering that AT&T spent so much (about $67 billion) to acquire DirecTV.

Merrill Lynch sees subscriber metrics as a loss of 1,000 broadband subscribers, down from a gain of 115,000 last quarter. Video subscriber declines moved from a loss of 170,000 down to a loss of 335,000; and wireless is also expected to lose on a post-paid basis.

Perhaps the one bit of good news here is for dividend investors. Merrill Lynch sees AT&T’s dividend as safe, despite the many concerns that merger investors might have had. The report said a dividend cut is unnecessary, as follows:

Several early press reports floated the idea AT&T would use an acquisition of Time Warner as an opportunity to reduce its dividend. AT&T has described its dividend as ‘sacrosanct’ and expects better coverage following the acquisition. Our analysis suggests that a dividend cut is not necessary to enable an equity-heavy deal of this size and, in fact, dividend coverage actually improves.

One blow that is obvious here is that Merrill Lynch is now using a much lower multiple for how it values AT&T’s earnings ahead. The $39 price objective is using an earnings multiple of just 13.5 times 2017 earnings, down from its previous multiple of 16 times earnings. This is now at the low end of AT&T’s historical valuation range relative to the S&P 500. The report said:

We believe AT&T relative multiple expansion will be constrained by a number of factors including the expected upcoming stock issuance, treasury yield spread and a tightening of the deal spread. At the same time, we believe this very low relative valuation offers support to AT&T’s current share price. Our target implies ATT can close roughly half the gap between its current and its long term average relative PE.

It’s always interesting to see summary and rationale commentary of a key stock when a firm downgrades its rating after having been positive for so long. The Merrill Lynch rationale looks quite different on July 13 than after the last earnings report in April.

Back on April 26, after lowering earnings estimates based on earnings, Merrill Lynch still had a Buy rating and a $46 price objective. The firm’s investment rationale at that time said:

AT&T is fundamentally sound, with a stable subscription-based business model. Historically, the stock has outperformed during periods of M&A and wireless margin expansion fueled EPS growth and during periods of market uncertainty when AT&T’s dividend yield, solid balance sheet and predictable business model are highly valued. We expect AT&T will generate improved financial performance post acquisition of DTV with upside to consensus EPS, greater dividend coverage and upside to synergy targets.

The new investment rationale from July 13 said:

AT&T is fundamentally sound, with a stable subscription-based business model. Historically, the stock has outperformed during periods of M&A and wireless margin expansion fueled EPS growth and during periods of market uncertainty when AT&T’s dividend yield, solid balance sheet and predictable business model are highly valued. We believe multiple expansion is limited in the near term by anticipated share issuance associated with TWX and near term fundamental headwinds.

Thursday’s midday trading had AT&T trading down another 1.3% to $36.36, in a prior 52-week range of $36.10 and $43.50 and with a prior consensus analyst target price of $40.73. The highest official analyst target was last seen at $48.00.

Wall Street investors already have been tough on AT&T during 2017. Its shares were down about 13% so far in 2017, and AT&T’s chart has been in a steady state of decline since March. Now the stock is challenging its lows from last October and November. AT&T’s chart put in lows close to $32 at multiple points in the past five years.

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