The acquisition of Time Warner Inc (NYSE:TWX) by AT&T Inc. (NYSE:T) appears to be a go. And the approval of the AT&T-TWX merger, announced Tuesday afternoon, already is reverberating through the market.
Time Warner’s stock surged 4.5% in after-hours trading and is currently up 2.6%, as the merger now appears to be a sure thing. T stock initially pulled back some 2.8%, as investors seem concerned about AT&T’s debt load following the purchase, and is down 5.3% as of this writing. Stocks in the media sector (and those awaiting M&A activity of their own) have reacted as well.
There’s simply a lot to unpack here. Clearly, the effect of the AT&T-TWX merger goes well beyond those two companies. So it’s worth considering what the merger, which now looks set to close within just a few days, means for stocks across the market.
What the Merger Means for AT&T and TWX
For Time Warner, the effect of the news is pretty simple. An acquisition announced all the way back in October 2016 should finally go through. Judge Richard Leon’s opinion suggested that any request for a stay from the Department of Justice would be denied. As a result, the lead attorney for AT&T said soon after the decision that the acquisition would close by June 20.
TWX’s spread, which discounted the possibility of the merger being blocked, thus has narrowed. An original $107.50 per share price won’t be realized because a collar mechanism in the original agreement leaves TWX shareholders receiving the maximum of 1.437 shares of T stock, plus $53.75 per share in cash.
T stock’s after-hours price of $33.39 values TWX in a merger scenario at $101.73 ($53.75 per share in cash plus 1.437 shares of T stock); TWX’s after-hours price of $100.54 suggests a sharply narrowed spread.
For T stock, the news is a bit more mixed. The market hasn’t exactly been fond of the deal. T stock is down almost 10% from its price on Oct. 21, 2016 — the day before the Time Warner acquisition was announced. One obvious concern is the company’s massive amount of debt, which should reach roughly $175 billion.
The second concern is that media stocks mostly have fallen. Since the acquisition was announced, CBS Corporation (NYSE:CBS) and Discovery Communications Inc. (NASDAQ:DISCA) both have dropped about 10%. Viacom, Inc. (NASDAQ:VIA,NASDAQ:VIAB) Class A shares have declined 21%.
What looked like a decent deal 20 months ago might not look nearly as attractive amid cord-cutting and concerns about subscriber declines for TWX’s TBS and TNT networks, which generate over half of Time Warner’s profits.
From a broad standpoint, I still think T stock has too many troubles to buy, as I argued back in November. The U.S. wireless industry still looks like a circular firing squad. DirecTV Now is off to a slow start, and the satellite offering is bleeding customers.
With or without Time Warner, AT&T is a highly indebted, low-growth company. That’s generally not a great combination.
Other Stocks on the Move
The approval of the AT&T-TWX tie-up has had effects elsewhere. Sprint Corp (NYSE:S) stock rose 3.6% in after-hours trading as investors bet that its acquisition by T-Mobile US Inc (NASDAQ:TMUS) was now more likely to go through.
Whether that’s true remains unclear: the Sprint-T-Mobile deal is a horizontal merger, as opposed to AT&T’s vertical purchase, and the odds of that deal reaching the same judge seem low. But the argument seems to be that a chastened Department of Justice might be less likely to risk another loss. After-hours gains in health care M&A targets Aetna Inc (NYSE:AET) and Express Scripts Holding Co (NASDAQ:ESRX) support that interpretation.
But the biggest impact likely will be in the media sector. Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA) likely will be the next target and the object of a potential bidding war between Walt Disney Co (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA).
CBS, Discovery and AMC Networks Inc (NASDAQ:AMCX) could be consolation prizes once the dust settles.
Indeed, barring a major surprise, the AT&T-TWX merger sets up consolidation in the media space between distributors and content producers. And it potentially sets up a nice run for those content owners.
With Time Warner now under AT&T’s control, other distributors are going to want to get in the act. As a result, Tuesday’s approval seems likely to be the first of many.
As of this writing, Vince Martin is long shares of AMC Networks Inc and CBS Corporation. He has no positions in any other securities mentioned.
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