Time Warner Shares May be Nearing Bottom Even If AT&T Deal Collapses
(Bloomberg Gadfly) -- For any Time Warner Inc. investor -- but especially merger arbitrageurs whose bets hinge on the company's deal with AT&T Inc. succeeding -- this is one ugly chart. Shares of the TV-network operator are trading almost as if there is no deal.
The U.S. Justice Department is expected to sue to block the transaction soon, potentially even as early as Wednesday, after regulators reportedly asked for concessions that the companies consider to be deal-breakers. They included selling either AT&T's DirecTV business or Time Warner's Turner Broadcasting division, which houses networks such as CNN and TBS.
This merger hasn't turned out the way most expected. The prevailing thought had been that it could win regulatory approval in the fall and close by year-end, a deadline AT&T CEO Randall Stephenson reiterated. Now it's looking like the companies are headed for a showdown in court that could take months, shrinking returns for merger arbitrageurs and leaving the future of several businesses and some 25,000 Time Warner employees up in the air.
While I do think AT&T stands a good shot in court and that the odds of the deal are better than the market is currently implying, now seems like the right time to think about what these companies and their stocks look like in the absence of their merger.
The good news for Time Warner shareholders is that there probably isn't much, if any, downside from here. The company reported good results for the third quarter, as pay-TV subscription revenue climbed even in the face of cord-cutting and "Wonder Woman" and "It" performed well at the box office. When United First Partners surveyed 77 investors recently about what they see as the stand-alone value of Time Warner, more than half pegged it at $80 a share and a quarter said $85. The stock opened at $85.94 on Wednesday.
While Time Warner would simply continue with what it's been doing -- or potentially even receive renewed takeover interest from Rupert Murdoch's 21st Century Fox Inc. -- the ramifications would be larger for AT&T.
For more than a year now, Stephenson has been selling his vision of a mobile-video entertainment powerhouse and it's resonated to the point that industry rivals started kicking the tires on deal options of their own. AT&T's stock is down 20 percent year-to-date, a combination of jitters about the deal and setbacks in the company's own businesses.
The wireless side hasn't been able to add as many subscribers as Verizon Communications Inc. and T-Mobile US Inc. amid more competitive data-plan pricing, while its DirecTV satellite business is shedding a lot of customers. Craig Moffett, a long-time industry analyst for MoffettNathanson LLC, said in a Bloomberg Radio interview last month that DirecTV is now probably worth about half what AT&T paid for it two years ago, which was $67 billion if you include debt.
That said, AT&T's balance sheet would be less strained if it doesn't acquire Time Warner. As I wrote in July, the deal would set off a tug of war over AT&T's cash -- with longtime investors clamoring for their dividend and buybacks, even as an increased debt load and increased spending on the build-out of the company's 5G wireless network suck up a lot of resources. It's hard to see how reducing leverage would be the top priority. Moody's Investors Service said Nov. 10 that while AT&T would have to pay Time Warner a $500 million breakup fee, the direct financial implications of the deal getting blocked are "relatively mild."
Until we know more, give a listen to this week's Deal of the Week podcast, where we dig into more of the details surrounding AT&T's Washington battle and try to make sense of a situation now clouded by speculation of Trump interference. Whether or not the Trump/CNN narrative is true (I suspect it isn't grounded in reality), it's certainly an effective way for AT&T to try to gain favor with Democratic lawmakers and the public, and it makes the regulatory process appear less above-board.
I've said it before: In the less likely scenario that AT&T-Time Warner is blocked, it probably won't be because of Trump's personal grievances ... or so I hope.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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