Since the Trump Administration moved to block the AT&T Inc. (NYSE:T) purchase of Time Warner Inc (NYSE:TWX), both AT&T stock and TWX have traded consistently above where they were when the case was launched.
Now that case is going to trial.
Stock analysts are treating this as a delay, not a denial, of the merger, noting that the courts haven’t stopped this kind of vertical integration in decades, and they might be right.
Their confidence is buoyed by the fact that Comcast Corporation (NASDAQ:CMCSA) ran into no problems buying NBC Universal early in the decade and it has gone merrily on its way.
But the Justice Department is now trying to use that fact to buttress its case, claiming the cable company’s flaunting of its rules means the only solution to concerns over media concentration is to block the new deal.
What If It’s Blocked?
While AT&T stock is trading about 10% higher than it was on Nov. 20, it remains an incredible bargain in a stretched market. It’s selling at less than 8 times earnings, despite a dividend yielding 5.4% … a dividend it can easily afford. This is in line with the price of Verizon Communications Inc. (NYSE:VZ), selling at 6.6 times earnings despite a dividend yielding 4.86%.
There is an assumption built into the price that the AT&T stock price-to-earnings ratio rises later this year, but even that takes you only to 11, super-cheap in a market where average stocks are trading at 25-times-earnings.
Something similar is going on with Time Warner. It’s trading at a P/E of 14.5, well below the market, although similar to other large entertainment companies like Walt Disney Co (NYSE:DIS).
Comcast, whose business is like that of AT&T’s, with Time Warner, is also trading at just a P/E of 7.5, but its dividend yield is much lower — just 2.1%.
By any conventional measure, then, AT&T stock looks like a bargain.
What Investors Are Forgetting
Investors are rushing out of the old-line cable companies and into streaming companies like Netflix Inc. (NASDAQ:NFLX), ignoring that the cable operators still control the “last mile” to customers.
After consumers cut the cable (or phone) cord, they can still only access a streaming service through an Internet Service Provider (ISP) contract which reaches their home. With net neutrality gone, the big cable companies remain the biggest ISPs, and are free, without net neutrality rules, to force content onto subscribers.
They already do this. ESPN3 and Watch ESPN from Disney aren’t really “free.” You pay for them, as part of your Internet subscription. There’s also nothing preventing ISPs from raising prices on captive consumers, adding content of their choosing to this TV Everywhere bundle.
In short, the big cable companies, being the last-mile ISPs, aren’t nearly as vulnerable to business disruption as investors currently think. It’s more like a business adjustment, the money subscribers were paying for cable going instead to internet service, and ultimately into the same hands as before.
In theory, 5G service could change this, making wired and wireless operators more competitive in terms of the speed they offer. But AT&T is already the dominant wireless carrier. Consumers that bundle AT&T Wireless service with AT&T internet and programming are paying it hundreds of dollars per month. That money isn’t going anywhere.
The Bottom Line
After the cloud of uncertainty now hanging over the internet and media businesses is lifted, consumers are going to find that the old boss they’re meeting is the same as the new boss they left, that the last mile controls access to what services they consume, and that whether they own programmers or not, companies like AT&T control the media board through their infrastructure.
The cable boys are a screaming buy.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in T.
