AT&T Inc. (NYSE:T) doesn’t need any more bad news. The T stock price now sits at a 22-month low. Concerns about competition and pricing pressure in the wireless business, subscriber defections at recently acquired DirecTV, and a large debt load have pushed the stock down 22% so far in 2017.
Now, a report from the Wall Street Journal suggests the company’s acquisition of Time Warner Inc (NYSE:TWX) could be in trouble. The Journal wrote that the Justice Department is considering an antitrust suit against the deal – while also considering a possible settlement.
The T stock price has dropped 1.4% as of this writing, with TWX down almost 6%.
But the report isn’t necessarily bad news for AT&T stock – or, at least, all bad news. This is not the outcome AT&T wanted — but however this plays out, there will be both reasons for more concern, and a silver lining or two.
Is the T-TWX Deal In Trouble?
It’s worth pointing out that the DOJ’s move is a major surprise. AT&T management said on the Q3 conference call just last week that it expected the deal to close by the end of the year.
TWX stock closed yesterday at $98.38, just a 3.6% discount to the takeover price. (While reports at the time of the deal cited a per-share price of $107.50, the decline in the T stock price has impacted that number. Under a ‘collar’ arrangement, TWX shareholders would get $53.75 per share in cash plus 1.437 shares of AT&T stock, which at yesterday’s close suggested a total value just shy of $102 per TWX share.) The market as a whole was pricing in a high likelihood of the deal going through on a timeline similar to that projected by AT&T.
Clearly, the potential antitrust action is unexpected. It’s also a little confusing — particularly the discussion of a potential settlement and what that might entail. This is a vertical merger after all: AT&T’s distribution and Time Warner’s content. It’s not a horizontal merger, where antitrust regulators might require the divestiture of part of the acquired company to ensure competition continues.
As the Journal points out, Comcast Corporation (NASDAQ:CMCSA) was able to acquire NBCUniversal — with restrictions requiring Comcast to distribute streaming services as well. It’s possible similar terms will be required for AT&T.
But there may be more going on here. President Trump criticized the merger last year, and the new head of the antitrust division, Makan Delrahim, has gone on record as being against those types of concessions, per the Journal. This may wind up being an “all or nothing” situation for AT&T and Time Warner — a situation few investors saw coming.
What Does That Mean For The T Stock Price?
So far, investors in T stock aren’t sure what to make of the news. T stock actually spiked when the report first was released, rising over 2% in just five minutes. It then reversed, falling 3%, before moderating.
And there is an argument as to whether AT&T is better off with, or without, Time Warner. On one hand, T stock did decline on the news of the original buyout. Concerns about the company’s debt load, which would exceed $180 billion should the acquisition go through, and the effect of interest expense on the T dividend, have been part of the reason T stock has struggled so badly in 2017.
Meanwhile, there’s a question as to whether the Time Warner business really is that attractive as cord-cutting accelerates. TWX’s HBO asset unquestionably is valuable, but over half of Time Warner operating income still comes from the Turner networks. And with stocks like Viacom, Inc. (NASDAQ:VIA, NASDAQ:VIAB), AMC Networks Inc (NASDAQ:AMCX), and Discovery Communications Inc. (NASDAQ:DISCA) all down sharply of late, it’s clear that investors see significant pressure coming for cable operators like Turner.
At the same time, however, what else can AT&T do at this point? As I wrote last month, the narrative surrounding T stock as a “safe” income play simply hasn’t caught up with the times. DirecTV is declining. DirecTV NOW is growing, but subscriber counts have been a bit disappointing in the early going. The U.S. wireless industry is turning into a circular firing squad, with the hoped-for help from a merger between Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS) looking increasingly unlikely.
Time Warner has its problems — but it still looks like a better business than anything AT&T has to offer at the moment.
Avoid T Stock Either Way
Overall, I think the market today has it about right: risk to the Time Warner deal is a modest negative for T stock. But from a broader standpoint, I don’t think it matters all that much. With or without Time Warner, AT&T is a heavily indebted company with limited growth prospects. That’s a dangerous combination. And it’s a combination investors — whether looking for income or growth — should avoid.
As of this writing, Vince Martin has no positions in any securities mentioned.
