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3 Big Implications of the AT&T-Time Warner Decision

Adam Levy, The Motley Fool

A federal judge on Tuesday approved the merger of AT&T (NYSE: T) and Time Warner (NYSE: TWX) after a six-week trial. While the decision will allow AT&T to move forward with its $85 billion acquisition, it will also have a much broader impact. The ruling opens the door for more massive corporate mergers and acquisitions in the media and telecom space, which could have a big impact on investors.

Here are three big implications of the AT&T-Time Warner decision.

AT&T office building.

Image source: AT&T.

Comcast could swipe Fox from Disney

Disney (NYSE: DIS) agreed late last year to acquire most of the cable and movie studio assets of Twenty First Century Fox (NASDAQ: FOXA). The move would make Disney more of a behemoth in television and movies, and enable it to compete with big streaming services by adding even more content to its own direct-to-consumer offering.

Meanwhile, Comcast (NASDAQ: CMCSA) has been eyeing both Fox and Sky Networks, the European pay-TV giant. Fox owns a 39% stake in Sky and has a bid of its own to acquire the rest of the company.

Comcast had reportedly prepared an all-cash offering for Fox even before the court announced the AT&T-Time Warner decision. Fox's management had said it prefers a deal with Disney because it believes it would be easier to gain regulatory approval, but with the recent court decision, that objection may be moot.

As a result, the decision is great news for Fox. Comcast investors may be excited by the news, as it would give the company the opportunity to buy both Fox and Sky, but those acquisitions would weigh heavily on the company's balance sheet. Conversely, the ruling is bad news for Disney, which might have to go back to the drawing board with Fox.

Odds of a T-Mobile and Sprint merger just improved

When T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) announced their planned merger, shares of both companies fell along with shares of AT&T and Verizon. The only explanation for the decline in share price across the board is the market's fears over whether the merger will be approved. The AT&T-Time Warner decision should mitigate those concerns and send stock prices higher across the board.

T-Mobile and Sprint merging provides the two companies with enough scale to take advantage of the huge fixed costs associated with operating a wireless network. The combined companies should be able to produce operating margins more closely in line with the wireless operations of Verizon and AT&T. T-Mobile's CFO, Braxton Carter, expects about $37 billion in synergies from combining the wireless networks and retail operations, among other things.

Without the need to scale, Sprint and T-Mobile may reduce the aggressiveness of their pricing and promotions, which could lead to better margins at AT&T and Verizon as well.

Vertical healthcare mergers should go through, too

There are two large mergers in the healthcare industry that are under scrutiny as well. CVS (NYSE: CVS) and Aetna (NYSE: AET) agreed to a $69 billion merger last October. The combined company would include a tripod of healthcare services including a retail pharmacy, a health insurer, and a pharmacy benefits manager. That's some significant vertical integration that would create quite an advantage over competitors.

Meanwhile, Cigna (NYSE: CI) agreed in March to buy Express Scripts (NASDAQ: ESRX) in a deal worth more than $50 billion in cash and stock. That would give Cigna two legs -- health insurance and a pharmacy benefits manager -- and put it on par with some of its larger competitors that have their own PBMs.

The increased likelihood of these vertical integration mergers going through following the AT&T-Time Warner decision should encourage investors. So far, that seems to be the case -- share prices for all four companies rose after the decision.

Broader implications

The AT&T-Time Warner decision makes it likely we will see many more of these large mergers and acquisitions by setting a precedent for a more hands-off approach to regulation. Fears of potential merger breakups should diminish, and it could lead to a lot more activity over the next few years. Investors would be wise to keep this bellwether case in mind moving forward, but that doesn't necessarily mean changing course to focus on companies only because they might be acquired. 

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Adam Levy owns shares of Express Scripts. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool owns shares of Verizon Communications. The Motley Fool recommends CVS Health and T-Mobile US. The Motley Fool has a disclosure policy.