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AT&T Wins Government Lawsuit, Seals Time Warner Merger Deal

Zacks Equity Research

AT&T Inc. T has received green signal from the court to go ahead with its proposed deal to buy the mass media and entertainment conglomerate, Time Warner TWX for $85 billion. This historic judgement marks the annulment of a sensational government lawsuit in favor of one of the biggest merger deals in the history of the United States. The deal is expected to be closed before the agreement deadline of Jun 21, 2018.

The Department of Justice ("DOJ"), which represented the government, argued that the deal will increase market concentration, decrease competition and lead to higher prices for TV programs and videos, disrupting the equilibrium of the market as a whole. However, District Judge Richard Leon refuted these claims arguing that the government failed to furnish enough evidence to back them. The government’s evaluation of the merger was based on the hypothesis that AT&T will be empowered to charge higher fees from pay TV distributors, failing which, it could withhold key channels like CNN and TNT. This power will also allow the company to raise prices of its own network, taking advantage of the fact that the most popular programs and games will be broadcasted via its own satellites. However, AT&T countered the claims arguing that this would cause grave economic impact and damage business in the long run. It also promised that there will be zero or minimal (about 45 cents per month per customer) price hikes, or disruption in the television market competition.

Political Twist

AT&T proposed to buy Time Warner back in October 2016, following which, the merger gained the approval of Time Warner shareholders, European Commission, Mexican, Chilean and Brazilian authorities in succession. The United States was the only country left to give the final green signal. Toward the end of 2017, the DOJ filed an antitrust lawsuit against AT&T over the deal, initiating a wave of mixed but strong response within the system.

Industry observers wondered why the seemingly “vertical” merger was coming under such tight scrutiny, whereas, major horizontal merger talks like the one between Disney and 21st Century Fox were merely awaiting an approval. In theory, horizontal mergers are the ones which potentially decrease market competition and distort prices, making them more vulnerable to government scrutiny.  Soon, it was clear that the source of this opposition was the hostile relationship of sorts between President Donald Trump and CNN, which had earlier covered his administration in negative light. The strong opposition to the merger deal seems, to many, a retaliation of the Trump government, even though it had earlier declared that it will conduct an unbiased scrutiny.

$85 Billion! Is the Merger Worth it?

Having discussed the political angle to the issue, let us now try to understand why AT&T is so keen on bringing Time Warner under its umbrella. In the past few months, AT&T has been facing difficulties retaining its customers. With tough competition from Verizon VZ, and falling mobile bills, AT&T believed that it will significantly benefit from the acquisition with improved media and entertainment domain. With Time Warner’s assets like HBO, CNN and TNT, the deal will allow the power packed combination of AT&T’s data and Time Warner’s content to create new kinds of online videos and sell targeted advertisements to counter Verizon’s Yahoo and AOL businesses. AT&T is already leading the telecommunications and wireless market. The merger will further enable the company to maintain a stronghold in the entertainment market as well, placing it in the lead. Given the scale of both AT&T and Times Warner, the merger is a historic one and is likely to reshape the industry dynamics creating a media behemoth.

What This Means for Competitors and Regulators

Sceptics are wary that the deal will clear the path for more mergers to take place unchecked, which might negatively impact the market. Further, the government fears that the cost to industry rivals will increase significantly as a result. As far as other companies are concerned, most of them are in agreement with this decision. For instance, now that the deal has been finalized, Comcast can confidently proceed with its goal to outbid Disney to acquire 21st Century Fox.

How Investors are Reacting

Following the victory, share price of Times Warner rose more than 5%. However, AT&T fell about 1.3% due to reasons like premium paid to Time Warner shareholders over the market price. Share price of companies expected to be acquired also shot up, leading to price of potential acquiring companies to fall. For instance, shares of Fox rose 7% and that of Comcast and Disney dropped 4.3% and 1.8%, respectively.

Price Performance

The stock has underperformed the industry in the past year with an average loss of 11.3% against a decline of 8.1% for the latter. It remains to be seen whether such a game-changing deal can turn the tables and boost the shares of the company.

Zacks Rank & Stock to Consider

AT&T currently has a Zacks Rank #3 (Hold). A better-ranked stock is Comtech Telecommunications Corp. CMTL sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comtech has an expected long-term earnings growth rate of 5%.

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