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AT&T-Time Warner Extend Deadline to Resolve Regulatory Issues

Zacks Equity Research

AT&T Inc T and Time Warner Inc TWX have reportedly extended the deadline of their proposed $85.4-billion merger to Apr 22, 2018. The duration of the deal was extended in order to gain the remaining regulatory approvals required to close the merger. This is the third instance when AT&T has changed the closure date.

Currently, AT&T carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Regulatory Nods & Concerns

Since the announcement in October 2016, the industry has been rife with speculation about whether the deal will receive regulatory approval. The pending merger has been approved by antitrust officials in 17 countries. AT&T has received approval from the European Commission, an institution of the European Union (EU) and from the Mexican telecommunications and broadcasting services regulator, Federal Telecommunications Institute (IFT). The deal is currently under review by the U.S. Department of Justice (DOJ) and competition authorities in other foreign countries. 

Notably, the latest extension comes a week after the DOJ filed a lawsuit in the U.S. District Court for the District of Columbia, against the proposed deal.

DOJ in its lawsuit stated that the AT&T-Time Warner merger will hurt American consumers. The proposed deal will eventually lead to price hikes by rival pay-TV operators and subscribers. It will also impede the development of online video.

Moreover, the proposed merger with Time Warner will provide AT&T a portfolio of lucrative contents. Time Warner's media empire includes HBO and Turner Broadcasting, which has the rights to sports telecasts. The company also owns the Warner Bros. film studio and cable networks TNT, TBS and CNN. Moreover, Time Warner owns a 10% stake in Internet video provider Hulu.

Therefore, the merged entity will enjoy control over high-quality content and distribution medium, which is likely to enable AT&T raise prices without further investments. The DOJ has asked AT&T to either divest DIRECTV division or Turner Broadcasting assets including CNN. However, the company denied the arguments.

AT&T’s Retort

In response, AT&T has decided to challenge the DOJ lawsuit in the court within the stipulated 60-day time period and is confident of winning over DOJ’s claims. Moreover, AT&T has argued that the proposed deal is technically a vertical merger. None of the two companies share any overlapping business. Therefore, the deal is not going to reduce the number of competitors either from media or pay-TV or phone industry.

Political Comments

President Donald Trump considers it a “bad deal” according to a Bloomberg report. Per the report, Trump is of the opinion that the deal will consolidate too much power in the media industry.

Trump has had an adversarial relationship with CNN. During his election campaign, he had stated on numerous occasions that CNN reporters covered him unfairly. Even after his inauguration as the president, Trump labelled CNN as "fake news."

Bottom Line

The DOJ’s decision on the AT&T-Time Warner deal has diverted investor’s attention on the ongoing telecom-cable TV-media convergence trend. Cable TV and telecom giants are foraying into the media industry with big ticket acquisitions. Comcast Corp CMCSA became a media mogul after acquiring NBC Universal in 2011. Verizon Communications Inc VZ has already acquired AOL and the core businesses of Yahoo.

With such strong administrative and political oppositions, we expect the pending deal to be completed within the scheduled time.

Price Performance

Despite such positives, AT&T’s price performance has been disappointing. In the past three months, shares of AT&T have lost 6.0% compared with the industry’s decline of 6.4%.

 

 

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