Editor’s Corner—What happens to Time Warner if AT&T deal is blocked?

Time Warner Center. Image courtesy of Time Warner, Inc.
Time Warner Center HQ (Time Warner Inc.)
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By many accounts, AT&T will emerge victorious next week when a judge hands down a ruling in the Justice Department’s attempt to block the Time Warner deal. But should AT&T lose, what will become of Time Warner?

AT&T is ready to close almost immediately after the ruling.

“It's now in the hands of Judge [Richard] Leon, and he has committed to having a ruling in order out on June 12. And in that regard, we stand ready to close. We're ready to close the transaction, so we're all sitting and waiting for the final order. So that's, obviously, priority #1,” AT&T CEO Randall Stephenson said during a recent investor conference according to a Seeking Alpha transcript.

AT&T CFO John Stephens echoed that confidence and assured that all the financing is in place. So, AT&T is confident, but some aren’t as positive the deal will go through

Should the deal be blocked, UBS analyst John Hodulik said that Time Warner’s stock would likely react negatively, but the downside would appear contained with the stock currently trading at 8.8x 2019E EBITDA vs. 9.0x in the year prior to the deal announcement and the 8.4x multiple at CBS.

“Despite the imminent court ruling, TWX is trading at a ~7% spread to the offer price. Assuming fair value of $88 per TWX share (8.5x 2019E EBITDA, similar to peers), we estimate current T/TWX share prices imply a ~50% probability of the deal closing,” Hodulik wrote in a research note.

Another scenario sees the deal go through with conditions.

Hodulik said that behavioral remedies like Time Warner’s proposed baseball-style arbitration during program licensing disputes wouldn’t derail the deal. But he said a structural remedy like forcing the sale of either DirecTV or Turner Broadcasting would be a non-starter, and the DOJ has asked for precisely that.

"The appropriate relief here is structural—either a permanent injunction of the proposed transaction, or a targeted divestiture," the DOJ wrote according to CNN. "The evidence at trial demonstrated that the bulk of the anticompetitive effects flow from the proposed combination of Turner with DirecTV."

Of course, even if the court approves the merger, the DOJ could appeal or ask for a stay and the resulting delay could derail the deal if it pushes it past the June 21 deadline.

In any event where AT&T and Time Warner don’t get to consummate their $85 billion merger, several interesting theories surround the fate of Time Warner and its long list of valuable programming assets.

Amy Yong, equity research analyst at Macquarie Capital, told Variety that Comcast could come after Time Warner. “A lot of people are going to look at them,” she told the publication. “John Malone has talked a lot about the ‘free radicals,’ Lionsgate being one of them. All of these content assets that are out there are strategic to someone.”

Comcast is considering trying to outbid Disney for Fox’s entertainment assets, but the company’s attempt to outbid Disney likely hinges on whether AT&T gets approval for its Time Warner deal.

If Time Warner were inclined to sell off pieces of its business, it could find other interested parties. Verizon has made it clear that it doesn’t intend to go after content, but CBS could be a suitor. CBS doesn’t want to merge with Viacom but reportedly would be interested in individual pieces of the company like Paramount, which would give CBS a movie studio and a back catalog to help populate its All Access streaming service. It’s possible that if Warner Bros. hit the market, CBS could be similarly interested in that.

But perhaps Time Warner would just go back doing what it has been doing, which seems to be working well for the company at the moment. Michael Nathanson, analyst for MoffettNathanson, said that when the deal was first announced in 2016, Time Warner looked like a “smart seller” for consolidating amid secular pressure and increased competition for Turner, HBO and Warner Bros.

“However, a year and a half later, management has guided to (and so far, is delivering on) 2018 affiliate fee growth in the mid-single digits for Turner and in the double-digits for HBO. Furthermore, the company plans to grow OI in the high single digits, with growth at each individual segment,” Nathanson wrote in an April 2018 research note.

The odds favor AT&T and Time Warner getting the official OK and setting off another wave of media consolidation on June 12. But should things work out differently, several options are still on the table for Time Warner. — Ben | @fierce_video

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