Most investors likely think a position in Time Warner Inc (NYSE:TWX) is a binary event. An approved acquisition by AT&T Inc. (NYSE:T) would send TWX stock higher, while a successful bid from the DOJ to legally block the merger would pull the rug out from underneath Time Warner shares.
And just a few days ago, in front of the aforementioned trial, the duality of the matter may have kept some speculators at bay. There simply wasn’t enough certainty to take a blind swing. But between this week’s pretrial victory for AT&T in addition to a bullish point made by UBS, the upside of a Time Warner was inflated, and the downside risk was minimized.
AT&T’s Strengthening Legal Argument
The concern about the melding of telecom and cable television giant AT&T with entertainment icon Time Warner isn’t an unmerited one. In the past, the lines between the media and the medium were finite and respected. It’s not entirely clear what happens when the message and the messenger are one and the same.
The Department of Justice isn’t interested in taking chances though, suing late last year to block the pairing that was announced in late 2016. The legal argument against the acquisition isn’t a particularly strong one, but in a world where a sense of fairness means more in a courtroom than the letter or logic of the law does, even the experts weren’t confident in the outcome.
But there’s good news for owners of TWX stock that were hoping/counting on the deal’s green light. AT&T will be allowed to tout the fact that it’s entered a seven-year commitment to arbitrate any licensing disputes with other cable providers. Specifically, AT&T won’t be removing channels from its usual lineup as a means of applying pressure to partners it can’t come to terms with.
It’s a small but powerful message that the buyer isn’t making the move simply as a means of capitalizing on the ever-decreasing number of consumer options.
The stronger legal argument in favor of the acquisition improves the odds of a deal being permitted. But at the same time, the risk of the court case working against Time Warner has been greatly reduced.
He’s Got a Good Point
Giving credit where it’s due, UBS analyst John Hodulik made a great point earlier this week when he upgraded TWX stock to a “Buy,” explaining:
“While we expect AT&T’s acquisition of Time Warner to be approved, we believe this environment would make Time Warner’s assets highly attractive to other media companies and internet-based competitors were the deal to be blocked. Recent M&A multiples suggest little downside (and potential competitive bidding) for these assets were the deal to get rejected.”
In other words, if AT&T can’t grab Time Warner’s HBO by making a bid for Time Warner in its entirety, somebody else likely will.
And there are plenty to choose from, if the end-goal from Time Warner is to partner up with distributors in an environment where there are very few technical or marketability limitations. Time Warner is also the name behind Warner Brothers and Turner as well as HBO, offering a suitor access to movies and television shows and a decent means of distributing them.
And for the record, Time Warner didn’t exactly resist AT&T’s overtures. Perhaps the company realized that its best bet was embracing the new-era business model before anyone else took a swing as bold as the one AT&T and Time Warner are trying to take.
Bottom Line for TWX Stock
A reason to step into TWX stock if you don’t own it already? Not necessarily — at least not by itself. It’s certainly not a reason to steer clear of it, though, or to dump it before the courtroom drama begins next week.
That said, speculators should also know they need not hold their breath. While the trial itself shouldn’t take terribly long, deliberations could linger. And, if the court’s decision is to bar the acquisition, it could take months if not quarters for Time Warner to shop its divisions around to other buyers.
That’s OK, though. While a tough trial outcome will likely initially send TWX stock lower, it shouldn’t take all that long for investors and other interested buyers to realize Time Warner is still a name that can grow the top and bottom line.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.