Time Warner Inc. investors are becoming convinced the company's sale to AT&T Inc. will get done, even though President Donald Trump at one point seemed intent on stopping it. But don't get too excited.
The probability of the $108.7 billion deal closing, implied by Time Warner's stock price, has shot up to near 70 percent in just the past couple of weeks.
Market optimism about the politically controversial merger was triggered by recent comments from Ajit Pai, the Republican regulator who President Trump elevated to chairman of the U.S. Federal Communications Commission. Pai said in February that the transaction won't be subject to a review by his agency, a win for the companies as the FCC was considered to be a tougher sell than the Justice Department. During a Senate hearing Wednesday, Pai added that he hasn't discussed the merger with Trump, who on the campaign trail labeled it a "poison" to democracy.
A nod from the DOJ isn't a sure thing. But the conventional wisdom is that it's difficult to block a vertically integrated merger on antitrust grounds, given that the number of competitors in the marketplace won't be reduced.
Say this assumption of a done deal is correct -- investors should still take heed. The combined AT&T-Time Warner entity won't be this shiny, new object, and some of the benefits of the transaction have already eroded a little since it was announced in October. That's reflected in the stock, which has given up some of its post-deal gains and is now down about 2 percent year to date.
Take zero-rating. It refers to how AT&T began allowing its DirecTV customers to stream on their device without the app eating up any of their allotted data. Previous FCC Chairman Tom Wheeler blasted this (and Verizon Communications Inc.'s similar offering) as anti-competitive because it hamstrings consumer choices. Buying Time Warner, which owns channels such as HBO and TBS, played into this strategy to take on rivals such as Netflix Inc.
However, pesky T-Mobile US Inc. shook things up with a new unlimited-data offering in January, which effectively forced the other carriers to quickly follow suit even though they really didn't want to. Now, AT&T customers can pay for unlimited data, so zero-rating is pretty much moot, and it even added an incentive: a $25 credit toward DirecTV. Pai's all, "Look, the FCC didn't need to get worked up about this zero-rating stuff after all!" But AT&T's plan to have a super-unique mobile-video offering got somewhat stymied before even completing the purchase of an essential piece of it.
There's also the fact that the new AT&T doesn't look that advantaged versus rivals such as Verizon, which are dependent on revenue from wireless. Craig Moffett of MoffettNathanson LLC explained it in a report Feb. 21, showing how AT&T's non-wireless assets are still in secular decline. In other words, sure, AT&T is diversifying by having acquired DirecTV and now Time Warner, but satellite-TV is shrinking and Time Warner will contribute only a small slice of revenue, so the bigger picture isn't changing much.
AT&T management have also talked up the whopping $60 billion of Ebitda the company is expected to generate. Only one other company in the S&P 500 Index is more profitable by that measure: Apple Inc. But it's less impressive when you take into account that AT&T already generates more than $50 billion of Ebitda, and it's taking on a ton of debt to buy Time Warner without the deal adding a whole lot to its bottom line. AT&T also sacrificed its A- credit rating to do so.
Time Warner has some of the best TV content, but it's not clear that the acquisition makes AT&T that much more of a compelling investment. I won't fault CEO Randall Stephenson for his vision, given the absence of other great alternative growth options for wireless providers right now. But as with most megamergers, the advantages look less so than they did back in October when the excitement was fresh.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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