Time Warner Shares Dropping as Wall Street Worries About Merger

Hollywood's make or break Moments: 4 - Time Warner - H 2015
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A swoon has left Time Warner with a market cap of $68.1 billion, well below the $85.4 billion AT&T agreed to pay for the media-entertainment conglomerate.

Wall Street apparently has its doubts about AT&T closing its acquisition of Time Warner, shares of which have fallen 15 percent in less than a month as the U.S. Justice Department has signaled that it objects to aspects of the merger.

The swoon has left Time Warner with a market cap of $68.1 billion, well below the $85.4 billion AT&T agreed to pay for the media-entertainment conglomerate.

Late Tuesday, BTIG analyst Richard Greenfield told clients: "We now believe AT&T and Time Warner have been informed by the DOJ that a lawsuit is imminent. We believe a lawsuit could hit as early as (Wednesday)."

Three weeks ago, when executives were still confident a merger would happen by year's end, Time Warner shares were consistently trading in the $103 range, but on Tuesday they were at $87.51, roughly where they were when the deal was announced 12 months ago.

Considering Time Warner shareholders are set to receive $107.50 per share from AT&T, it should be a great opportunity for a healthy arbitrage, but many investors are no longer willing to take the risk. If the merger falls apart, goes the thinking, Time Warner shares could sink another $10 or so, unless another buyer steps up with a similar offer.

The catalyst for the precipitous fall in share price is that regulators are balking at giving their approval absent of concessions that the two companies are so far unwilling to make. 

On Oct. 23, the companies extended their expired merger agreement "for a short period of time to facilitate obtaining final regulatory approval," according to an SEC filing. 

The stock headed south for several days after that disclosure, then on Nov. 8 it was revealed that the DOJ wanted AT&T to sell DirecTV or Time Warner to shed Turner Broadcasting, including CNN, before it would approve the merger.

That news sent the stock lower still, especially since AT&T CEO Randall Stephenson said he will not jettison CNN to get a deal done.

"It's important to set the record straight," Stephenson told The Hollywood Reporter on Nov. 8. "Throughout this process, I have never offered to sell CNN and have no intention of doing so."

On Tuesday, Greenfield posited that regulators today aren't impressed with the results of Comcast's merger with NBCUniversal in 2011, so they are being ultra-careful with their approval of the AT&T-Time Warner merger.

"Buying Time Warner gives AT&T access to must-have, irreplaceable programming from HBO's Game of Thrones to Turner's NBA, NCAA and MLB rights that it could use to harm competition and consumers," Greenfield wrote Tuesday. 

He also wrote that a "DOJ lawsuit feels inevitable," adding that regulators would not have made divestiture demands "if they were not fully prepared to go to trial and win."

Meanwhile, speculation has ramped up that President Donald Trump is making his disdain for CNN an issue behind the scenes. Attorney General Jeff Sessions told a House Judiciary Committee on Tuesday, though, that he "cannot accept the accuracy" of news reports suggesting Trump is attempting to manipulate the merger process.

Richfield even opined Tuesday that, should the merger go through, it could represent a public-relations victory for the president.

"We could envision President Donald Trump saying 'Fake Courts' and taking the populist approach that he tried and failed to stop big media from getting bigger," the analyst wrote.