For those that aren’t aware, AT&T Inc. (NYSE:T) is attempting to buy Time Warner Inc (NYSE:TWX) for roughly $85 billion. The Department of Justice pushed back, saying that the deal would make it more expensive for consumers and less competitive.
While the decision will obviously have a big impact on the two companies, the DOJ ruling on AT&T-Time Warner will have wide-reaching implications for others too.
Back It Up: AT&T and Time Warner
First, why is AT&T doing this? As most already know, AT&T is a cell phone service provider. In 2015, the company dumped over $67 billion into acquiring DirecTV. Essentially, it gave AT&T an easy tack-on business for its cell phone service and allowed it to distribute content.
Think about it: AT&T can now sell its DirecTV service to customers who use its internet and/or cell phone service. It could also rope customers in by allowing them to stream their DirecTV content on their phones or tablets. It made sense, with that exception that cord-cutting was about to gain a lot of steam.
Now AT&T’s been struggling with DirecTV, as subscribers are in decline and as margins come under pressure. That’s why it’s looking to add an even bigger player in Time Warner, a company that produces its own content.
Time Warner’s assets include channels and platforms like HBO, CNN, TNT, TruTV, TBS, Cartoon Network and much more. TWX also has a studio segment with Warner Bros.
Clearly, TWX is attractive and, at $85.4 billion, it’s hardly cheap. But it’s what AT&T says it needs to compete with companies like Netflix, Inc. (NASDAQ:NFLX) and the rising fear that Silicon Valley — with its seemingly bottomless pockets — will get more into the content business.
If Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) via its YouTube and YouTubeTV offerings, Amazon.com, Inc. (NASDAQ:AMZN) via Prime and Apple Inc. (NASDAQ:AAPL) make a larger push into content, who’s going to step in to outbid them? Already NFLX has dethroned Walt Disney Co (NYSE:DIS) as the largest media company.
As interesting as this story is, it’s only one piece to the puzzle when it comes to the DOJ ruling on AT&T-Time Warner.
DOJ Ruling on AT&T-Time Warner
Investors are watching this ruling closely, which is expected shortly after the close on Tuesday. The reasoning? The DOJ ruling on AT&T-Time Warner will set the regulatory precedence going forward for others looking to make big moves.
For instance, Comcast Corporation (NASDAQ:CMCSA) has been feeling the heat to do something as T-TWX look to merge and as others in the space consolidate too. Namely, Comcast has been butting up against Disney’s efforts to acquire more assets.
The House of Mouse has been in agreement to buy most of the assets of Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA), save for a few channels and assets that would give Disney too much of a monopoly. At that the same time, FOX is trying to buy the rest of Sky that it doesn’t already own, which would eventually go to Disney.
Well, Comcast was trying bid for Sky and it wants to push Disney out for its bid on Fox’s assets. Fox has resisted Comcast’s M&A desires due to regulatory worries. However, if the T-TWX deal gets the green light, than it’s likely CMCSA will move forward with its offer for FOX.
In the same light, it increases the odds that T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) will see their $26.5 billion merger approved, one that certainly faces regulatory hurdles.
The Bottom Line
Of course, the DOJ ruling on AT&T-Time Warner isn’t the end-all-be-all for stock-market M&A.
However, it does set the tone that will likely spell whether some deals get done in the future and what bidding wars could open up for others. Plus, it will boost or hinder the M&A confidence of corporate America in the future, depending on which way the deal goes.
On the flip side, blocking the T-TWX deal would leave T without TWX, doubts over the S and TMUS merger and DIS as the likely (and sole) buyer of FOX assets.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AAPL.
