Media conglomerate Time Warner Inc (NYSE:TWX) has had a bumpy year after the company’s share price plummeted on news that antitrust regulators were sniffing around its merger deal with AT&T Inc. (NYSE:T).
However, as the trial has been unfolding over the past few weeks, it is looking more and more likely that the two will eventually merge as planned — an outcome that would send TWX stock more than 10% higher.
The Trial Leans in TWX’s Favor
So far, the case against a TWX and AT&T partnership looks flimsy. As my colleague Lawrence Meyers pointed out, the majority of the antitrust concerns hinge on distribution of Time Warner’s Turner Networks content, which AT&T has argued won’t be an issue.
The Department of Justice is worried that letting AT&T own the Turner content would allow the firm to raise fees for distributors, a cost that the DOJ says would eventually be passed on to customers.
However, AT&T has been adamant that the reason for the merger isn’t increasing content fees, but instead creating a better advertising model. From that vantage point, increasing fees for Turner content would be a poor choice by AT&T management, because it would cause the firm to lose out on advertising revenue — its main objective for the deal.
TWX CEO Jeff Bewkes echoed that sentiment when he took the stand on Wednesday, saying that without AT&T’s infrastructure and technology, Time Warner doesn’t stand a chance against subscription services like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN).
It’s not beneficial to either company to withhold programming because it would result in major advertising revenue losses.
On Thursday AT&T CEO Randall Stephenson also argued that by allowing the two to merge, regulators would actually be helping expand innovation in the streaming space because T is planning to bring out its own, slimmed-down subscription service called “Watch” for just $15 per month.
Stephenson said the merger will allow AT&T to build out its mobile video offerings by joining AT&T’s platform with TWX’s content. The deal, he said, would help foster competition in the streaming space rather than stifle it.
If the Deal Is On
Looking at what’s been said at trial and the argument against the merger, it appears that a merger is on the horizon. In that scenario, TWX investors win because at just around $96 per share, it’s still well below AT&T’s bid of $107.50.
Of course, with the trial still dragging on, the merger wouldn’t be complete until later this year at the earliest, so investors would have to be ready to ride out some bumpiness. However, with a merger looking like the most likely outcome, buying TWX now looks like a good bet.
If the Deal Is Off
Of course, there’s still a possibility that regulators will block the deal which would be detrimental to TWX stock. While that outcome looks like the least likely, it’s still not as bad as you might think.
If the deal doesn’t go through, TWX is likely to slide significantly in the aftermath as investors digest the news. However, once the dust settles, Time Warner stock will probably be able to climb back up to its current value because although the company doesn’t have a clear future, its earning power is solid for the near term.
Some analysts are even expecting TWX stock to benefit if the deal is blocked. Deutsche Bank has set a price target of $120 for Time Warner if the firm continues on its own, saying that the company is actually worth much more than AT&T has agreed to pay for it.
The Bottom Line on TWX Stock
When mergers get wrapped up in antitrust litigation, it can be a scary place to put your money. However, in this case, TWX looks like it will come out on top no matter the outcome.
The most likely situation would give investors a more than 10% upside, but even if the deal falls through, losses are unlikely as long as shareholders have a bit of patience. For that reason, TWX stock appears to be in a unique win-win situation that offers investors a great deal of upside with very little risk.
As of this writing, Laura Hoy was long AMZN, NFLX and TWX.
