Buying Time Warner has Risk, but it Makes Sense for AT&T Stock
AT&T Inc. (NYSE:T) is not your typical telecom. Forget the landlines and even the mobile phones; there’s ever more profit to be made from owning and delivering that elusive product known as “content.” All that investors need to know about content is that owning as much of it as possible is the goal. This is why AT&T stock could hit new highs in 2017, after announcing its intention to buy Time Warner Inc (NYSE:TWX).
Surely, Time Warner stock is the one that has benefited the most so far. It surged on rumors of the deal last week. Then there are the comments from businessman and presidential candidate Donald Trump, who said the deal should not be allowed to pass. It’s not clear what influence such a comment may have played, but AT&T stock has been riding a bullish wave in the past few weeks.
Indeed, AT&T has gained over seven percent year-to-date. Certainly, T stock owners might entertain more than reasonable doubts about the mega $86.0-billion deal. To pull it off, AT&T has secured a $40.0 billion credit line, which some analysts suggest would end up creating a “debt giant.” Indeed, critics warn that AT&T could look more like a bank than a telecom-media company. (Source: “To Secure a Mega-Merger, AT&T Plans to Shoulder Mega-Debt,” The New York Times, October 23, 2016.)
AT&T-TWX Deal Has More Opportunity than Risk
These are valid concerns over what might be a historic and gigantic deal. But there is another side, which looks at the longer-term view. This is the one that feared that T stock would be falling because of inaction, eventually collapsing as some of its direct or indirect rivals gobbled up Time Warner. Verizon Communications Inc. (NYSE:VZ), for instance, is still dealing with Yahoo! Inc. (NASDAQ:YHOO). Yahoo’s e-mail scandal and all, it looks like that deal will go through.
Notwithstanding warnings from Trump—who said, “As an example of the power structure I’m fighting, AT&T is buying Time Warner — and thus CNN — a deal we will not approve in my administration…”—the TWX stock deal should be good for AT&T. (Source: “Trump as President Won’t Approve AT&T-Time Warner, Will Break Up Comcast-NBCU (Video),” The Wrap, October 22, 2016.)
In the long run, the AT&T-Time Warner deal is about evolution and survival for the old “Ma Bell.” Exploitation of the irrefutable fact that more and more people and forsaking their TV sets to get their entertainment fix on mobile phones and “iPads” is what the deal is all about. It’s also why the deal had to happen; its focus is on what’s new and what will happen next. That’s why it has such bullish potential.
AT&T–Time Warner Merger Should Pass Antitrust Test
Surely, the Federal Communications Commission (FCC) and other government authorities will evaluate the AT&T-TWX deal, assessing economic conditions and risks to consumers. But they will also study the technological evolution of television and of communication networks. This is where AT&T wins its case, both where the law and T stock shareholders are concerned. AT&T can simply present the deal as necessary to its very survival.
That aside, AT&T would end up getting a large concentration of media power. AT&T, a giant Internet and mobile provider, will—after approval—acquire the top television content producer in America. This is the network (it owns HBO) that produced such popular shows as Game of Thrones and The Sopranos, to name the first two that come to mind.
Time Warner also owns CNN and the broadcast rights to National Basketball Association (NBA) games. And that’s not even mentioning the other channels, like the Cartoon Network, and the thousands of films made by the Warner Bros. studios. It even owns Bugs Bunny. This is not a cunning-but-doomed-to-fail Wile E. Coyote scheme.
While the temptation exists for AT&T to make such a huge—or “yuge,” if you will—treasury of content only to subscribers to its networks, it would not do that. It makes more sense to distribute the programs to a wider market. It can, however, develop new tools for its network subscribers, enhancing that content, thereby attracting more customers. But that’s more in the present; the real bullish case for the $86.0-billion deal is the future.
Youth, especially—in the United States, most of all—are using their smartphones or tablets to get their entertainment fixes. To them, TV schedules and lineups have become an annoyance that have lost meaning. This has been one of the main causes of falling cable TV subscription rates. Meanwhile, the rise of on-demand, Internet-based entertainment options, such as Netflix Inc. (NASDAQ:NFLX), have opened the path to the future of TV, or rather the future of video entertainment.
Such is the rationale behind AT&T stock’s intended acquisition of Time Warner. The company is simply adapting its business to the evolution of technology and the changes in user behavior. Therefore, antitrust authorities and investors will likely concede. AT&T had no choice but to formally offer to acquire Time Warner. Both companies are satisfied with the terms of the deal.