On June 12, a decision will finally arrive in AT&T’s nearly 20-month quest to buy Time Warner. But Time Warner may not be looking for the same decisive victory as AT&T.
Evercore analyst Vijay Jayant speculates that Time Warner would benefit most from a scenario in which AT&T wins deal approval but the Justice Department earns the right to appeal the decision and delay the close past the June 21 merger deadline.
“At that point, T would need TWX’s consent to further extend the merger agreement, providing TWX the opportunity to push for a sweetener [or] simply walk and pursue other options, with the positive trial court decision providing an encouraging backdrop for media M&A,” Jayant wrote in a research note.
He said that if the deal doesn’t close, Evercore imagines Time Warner would trade to $100-$105 by the end of fiscal 2018 on a standalone basis, and potentially $125-$135 in a takeout scenario, or between these levels if some M&A premium becomes built into the stock.
“That’s well above the current $101.72 price TWX holders would obtain if the T deal closes with T shares at current levels,” Jayant wrote.
Jayant said that Time Warner will have to give its blessing either way, either giving AT&T the OK to appeal if the DOJ wins or giving AT&T the OK to extend the merger deadline if AT&T wins and the DOJ appeals.
If the DOJ wins and the merger is blocked (at least temporarily), Evercore expects near-term damages for Time Warner, with its stock sinking to the mid-$80s.
UBS analyst John Hodulik concurred somewhat. He said that if the deal is blocked Time Warner’s stock would likely react negatively, but the downside would appear contained with the stock currently trading at 8.8x 2019E EBITDA versus 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.