Buy Time Warner Inc Stock for the Inevitable Merger ‘OK’

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The market was rocked on Thursday when The Wall Street Journal announced that the Department of Justice may litigate to block the proposed merger between AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX), over antitrust issues. TWX stock cratered from $98.39 to as low as $92.02 on the news, closing down 3.8% at $94.70.

Here's How to Play Time Warner Inc Stock for Inevitable DOJ Merger OK

TWX stock is up less than 0.1% in pre-market trading at 6:04 a.m. this morning in New York.

What’s going on? Is the deal really in trouble? Will the DOJ really litigate?

No and no.

Here’s why not, and how you can profit.

This is a vertical merger, not a horizontal one. That is, the merger isn’t reducing competition for anyone. AT&T has telecom assets, satellite cable assets, and very limited content creation. Time Warner is a pure content play.

There is nothing to be concerned about with regards to antitrust. Time Warner no longer has cable assets. They were sold to Charter Communications, Inc. (NASDAQ:CHTR) in 2016 — probably in anticipation of a possible merger.

Apparently, the biggest issue involves conditions that would protect rival video programming distributors’ access to Time Warner content and create an arbitration system to resolve disputes. Historically, content providers, programmers and distributors have always found ways to work things out. It is in everyone’s best interests for the consumer to get the content that they want.

All Possible Scenarios

AT&T wasn’t lying when it issued its statement, saying: “When the DOJ reviews any transaction, it is common and expected for both sides to prepare for all possible scenarios.

For over 40 years, vertical mergers like this one have always been approved because they benefit consumers without removing any competitors from the market. While we won’t comment on our discussions with DOJ, we see no reason in the law or the facts why this transaction should be an exception.”

Moreover, the new guy in charge of the DOJ anti-trust division — Makan Delrahim, who was confirmed by Congress in late September– has already made it clear that he doesn’t see this as a major antitrust problem.

President Trump has grumbled about the merger, particularly in regards to his fake news nemesis, CNN, which is owned by Time Warner. However, it is ridiculous to assume that either the President has any power over the merger, and/or that CNN would be a stumbling block.

 

The reason is that once the merger is complete, CNN can be completely torn apart and reorganized. AT&T Entertainment Group CEO John Stankey will run Time Warner’s assets, including CNN.

Stankey is a Republican and AT&T’s PAC has traditionally contributed twice as much money to Republicans compared to Democratic contributions. That means that CNN chief Jeff Zucker will probably get canned.

Negotiating Tactics

Cowen & Co analysts said this leak to the Wall Street Journal is “likely a negotiating tactic by the DOJ and that the deal is still likely to close”.

I agree. Both parties were undoubtedly negotiating conditions for the merger, and AT&T probably started getting pushy about some of the items. So the DOJ is pushing back.

The thing is, the DOJ didn’t block Comcast Corporation (NASDAQ:CMCSA) when it purchased NBC-Universal. It didn’t even mention anything publicly.

In fact, even when the AT&T/T-Mobile Us Inc (NYSE:PCS) deal blew up, the DOJ didn’t make some big show of force, either.

Playing TWX Stock Now

This all seems like saber-rattling by the DOJ, and there’s certainly no guarantee it would win in court.

So with TWX stock now at $95, what’s the play? I personally bought some TWX Jan 19 $95 calls. I think the minimum price the merger occurs at is $102 — when accounting for the AT&T stock portion of the deal.

It seems much more likely to me that it goes out between $105 and $107.50 once the smoke clears.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns Time Warner calls and has sold naked puts against Time Warner stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/play-time-warner-for-inevitable-doj-att-merger-ok/.

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