The good news is this is going to be a very entertaining trial because the government’s case is so ridiculous that, when the trial concludes, we will all be having a laugh at the Department of Justice’s expense.
That assumes, of course, that the judge overseeing the trial doesn’t have a bout of unprecedented stupidity.
AT&T stock has numerous arguments in its favor. The most striking is that content consumption is rapidly moving away from traditional standards and into a very fractured and competitive new era for distribution. The merger is not only legal, but very likely essential for both entities to be competitive in this new era.
But what is really hilarious in a very sad way is that the government has been undermining its own argument. Its initial complaint was that the combined entity could threaten to withhold certain channels like TNT, TBS and CNN from other distributors, like Comcast Corporation (NASDAQ:CMCSA), and therefore force them to pay more for that content. That in turn would allow DirecTV to raise its own prices.
But here’s the kicker, the government’s own lead economic expert refutes that very theory, and does so conclusively. He actually believes that the merged entity will not withhold these networks for the reasons I pointed out in an article several weeks ago: they would lose both advertising and licensing revenues, which would outstrip any gains it might receive by denying programming.
AT&T Stock: Bright Prospects?
Not only that, he believes the merger will become so efficient from an operational standpoint, that the merged entity might even reduce prices for DirecTV consumers.
Talk about shooting yourself in the foot! Or rather, as AT&T actually wrote in its brief, “now, what remains of the government’s case, ‘like a Persian cat with its fur shaved, is alarmingly pale and thin’”.
It gets even more ridiculous. With its primary argument now having blown up, the government has pivoted to another claim that Turner will charge its pay-TV providers higher prices for Turner programming than it otherwise could have, and that the providers will pass on some portion of that price increase to their customers.
Yet the government itself just said that Turner can’t and won’t withhold programming! Then, the government presses this failed argument, and tries to come up with a model as to how much more customers may end up paying.
AT&T points out that this is a purely theoretical exercise relying on a hypothetical model. This model initially pegged the monthly increase per customer at only 27-cents-per subscriber. AT&T alleges that the model is so ridiculous that the government attempted to rejigger it with different inputs, and yet still only came out with an increase of 45-cents-per subscriber, per month.
By now, you’re getting a sense of why I think this trial is going to be akin to watching a clown running through a minefield.
All of this doesn’t even address what the real concern is about mergers. The point of antitrust law is to protect competition, not competitors. Vertical integration like this makes companies more efficient, and increases the pressure on competitors to up their game. That is, stoke more competitive. What happens with more competition? Prices go down.
What does this mean for TWX shareholders? TWX stock has jumped back up to $96 a share, as investors realize what a ridiculous case the government has. In addition, TWX stock has been benefiting from generally solid results. Even if the merger were to be blocked, TWX stock is probably worth somewhere around $95-per-share.
The buyout price was to be delivered half in cash and half in AT&T stock. At the time, the buyout price was pegged at $107.50 for TWX stock we don’t know for certain where that buyout price will end up since AT&T stock is variable in price from day-to-day, but I don’t see this going out at less than $103-per-share. The trial will wrap up fairly quickly and the judge should have a decision by the June 22 deadline.
That means you could buy TWX shares outright, you could buy calls and pay a slight premium, or you could sell naked puts against Time Warner stock and collect the premium. That’s one of the trades that my investment advisory newsletter, The Liberty Portfolio, has made repeatedly over the past several months and generated significant income from.
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 TWX. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.