AT&T Inc.’s (NYSE:T) proposed $85 billion buyout of Time Warner Inc (NYSE:TWX) hit another snag. Regarding the Justice Department’s lawsuit to prevent the transaction, a federal judge dismissed a motion from AT&T to get access to the internal communications of the Trump Administration. T stock is in something of a limbo, now.
The AT&T claim is that Donald Trump has a personal grudge against TWX (especially with the CNN division) and that this should become part of the case.
OK then, so what does this mean for T stock then? Well, it’s tough to tell. Keep in mind that there are tweets and video from Trump that show his disdain for CNN. So it will not be tough for the attorneys to make a case that there is politicization.
But on the other hand, there still remains lots of uncertainty about whether the deal will go through. The proposed buyout price is $110, which includes a combination of cash and AT&T stock. However, TWX is trading at $95.
AT&T Stock And The TWX Deal
Even without the deal, T stock should still be attractive, especially for investors looking for stable gains. Note that the current yield is an attractive 5.4%. For over 33 consecutive years, the company has raised the dividend.
As seen in the latest earnings report, the underlying fundamentals are also showing improvement. The tax reform bill will provide some juicy benefits, as the company reported a $20 billion gain. In fact, this will mean $3 billion in additional cash flows for the year.
The mobile business is also getting traction. During the quarter, there was a gain of 329,000 postpaid customers – bringing the total to 141.6 million. AT&T is the No. 2 player in the market, behind Verizon Communications Inc. (NYSE:VZ).
The company has had quite a bit of success with bundling its services as well as finding ways to keep the churn down.
Now it’s true that the DirecTV and U-verse businesses continue to languish. Although, should be no surprise as consumers continue cut the cord. The tremendous success of Netflix, Inc. (NASDAQ:NFLX) is evidence of this.
Yet AT&T has been taking steps to deal with this, such as with the DirecTV NOW streaming service. While it is fairly new, the growth has been encouraging. During the latest quarter, there were 368,000 new subscribers. In all, the base is about 1.2 million.
But of course, the buyout of TWX would be transformative for this digital strategy. It would be essentially be similar to Walt Disney Co’s (NYSE:DIS) proposed acquisition of the majority of assets of Twenty-First Century Fox Inc (NASDAQ:FOXA).
As for TWX, it has a treasure trove of marque content assets. There is the Warner Bros. film studio, which grossed over $5 billion last year. Some of the hits include Wonder Woman and It. The studio is also the No. 1 supplier of TV shows to the broadcast networks.
Next, TWX has the HBO platform, which continues to see nice gains in the subscription base. During the most recent quarter, there were 5 million new subscribers.
And finally, TWX has various cable assets that are performing well, such as TBS, TNT and Adult Swim.
Bottom Line On The T Stock Price
Predicting the outcome of the AT&T-TWX deal is dicey. But there still seems to be a good chance that it will get done. The transaction should not have a meaningful impact on the competitive landscape of the content business – which is enormous.
Besides, federal courts are bound by precedent. And it’s rare to see this kind of tie-up as having antitrust problems.
Finally, the valuation of T stock is reasonable, with the forward price-to-earnings ratio at 11X. For the most part, this provides a reasonable entry point, given that the company is seeing a pick-up in its mobile business and is making smart moves to get more aggressive with digital.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
