How investors can play the AT&T-Time Warner deadlock
Traders and investors who sprang into action to buy shares of Time Warner (TWX) right after AT&T (T) disclosed it was acquiring the global media and entertainment company are now stuck in limbo. With the surprise move by the US Justice Department on Nov. 20 to block the proposed $85 billion takeover deal, Time Warner shares were quick to react, tumbling to $87 a share from $90.
They had recovered most of that before edging back down again to $89.07 on Monday, but Time Warner's stock has lost some of its upward momentum. The government's decision dampened the animal spirits that fired up AT&T shareholders over the prospects of cornering Time Warner's multiple media bonanzas, such as CNN, TNT and Turner Broadcasting System. However, CNN is the cable news network President Donald Trump considers his nemesis, so speculation swiftly swirled that CNN is really the main reason the president's administration opposes the deal.
What should investors do? Maybe buy shares of both companies.
For sure, AT&T will be a much expanded and larger multidimensional telecom, media and entertainment giant with the acquisition of Time Warner. AT&T's global reach would be much more widened.
And if the Justice Department wins, what happens to Time Warner? It will mean other major suitors will then get a chance to go after Time Warner, which after all is now in play. At least a couple of major companies are salivating at the chance to bag Time Warner. And it would leave AT&T with other quarries to chase, which it would likely do in order to expand and grow further.
But these two possible eventualities are other stories, if that time comes. Many on Wall Street now predict the deal will go through in spite of Justice's efforts to quell it.
"We still see a settlement as possible, and failing that, we believe AT&T would prevail in court," said an analysts' study at investment firm Cowen, led by Doug Creutz, Colby Synesael and Paul Gallant. They noted that in at least two merger challenges by the Justice Department, the government settled after filing lawsuits, one in 2033 involving the First Data-Concord merger, and the other involving the American Airlines-US Airways deal in 2013.
But should the AT&T-Time Warner merger end up in court, Cowen's conclusion predicts a victory for this deal for a variety of reasons, based on law and precedents.
AT&T CEO Randal Stephenson has publicly stated that AT&T wouldn't sell CNN or any other part of Time Warner's assets as a condition of getting the government's approval. He described Justice's intervention as "defying logic."
Jennifer M. Fritzche, senior analyst at Wells Fargo Securities, is among Wall Street analysts who also sees AT&T prevailing in court. "We continue to believe that the facts and law are on AT&T's side," although the overhang of a lawsuit "could add a different intangible dimension to the company's current momentum." So she expects AT&T and Time Warner to request an expedited trial before the US Court District Court.
AT&T's stock closed Monday at $34.68 a share, down from $38 in early October. Fritzche rates it as "outperform." Marci Ryvicker, equity analyst at Wells Fargo who follows Time Warner, rates the stock as "market perform" with a price target of $100. It traded as high as $103.03 in early October, almost level with its 52-week high of $103.90.
The negative impact of Justice's opposition "is largely priced in for AT&T, and TWC is also close to its support level," said John C. Hodulik, equity analyst at UBS. "Our base case remains that the deal ultimately closes," he said. And he noted that while the Time Warner deal is "accretive to earnings and free cash flow -- with the stock trading at multiyear lows, a 40 percent discount to the market and a 5.8 percent dividend yield -- we believe much of the uncertainty is priced in."
Given Time Warner stock's traditional premium, Hodulik believes the shares will find support at 12 times earnings (vs. its historical average price-earnings ratio of 13), implying a stock price of $78. So he's maintaining his target for Time Warner of $108, and $39 for AT&T.
Greg P. Miller, analyst at SunTrust Robinson Humphrey, describes the Justice lawsuit as a "heavy-handed attempt to wring some concessions out of AT&T-TWX to secure smoother approval." Given the two companies' stance, however, and their confidence the US District Court will reject Justice's claim, "we believe no such concessions -- including material asset sales -- are forthcoming through this process," he argued. "We believe law and precedent are on the companies' side and ultimately expect the court to approve the merger, but cannot rule out some form of concession," said Miller.
AT&T has maintained the deal will bring consumer benefits and said it has no intention of offering a solution beyond what the law will require, if even for expediency, Miller pointed out. Management also asserted that the law doesn't require divestitures of AT&T and Time Warner assets, "and specifically, a deal involving divestiture of CNN is a nonstarter."
So with Justice's lawsuit weighing on the shares of both AT&T and Time Warner, both stocks should be seen as an opportunistic buy, no matter what the lawsuit produces. Both shares, most Wall Street analysts point out, are likely to benefit whether the suit is upheld -- or dumped.
