Time Warner Stock Drops as Wall Street Debates AT&T Deal

Hollywood's make or break Moments: 4 - Time Warner - H 2015
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Sector stocks are mixed as analysts debate the benefits of the transaction and whether there will be a new deal wave.

Entertainment industry stocks had a mixed Monday morning despite AT&T's late Saturday unveiling of its $85.4 billion deal to acquire Time Warner as analysts discussed the deal, its outlook and regulatory review and if it could lead to further industry deals.

Time Warner shares were down 2.8 percent at $86.98 at 9:50 a.m. ET, nowhere close to the $107.50 per share price, to be paid half in cash, half in AT&T stock, that the telecom giant agreed to pay for the company. The stock had over the past year traded between $55.53 and $94.44 through and including Friday.

A media investor suggested the drop was due to concerns that the deal could run into regulatory hurdles and not bring all the benefits promised. And Jefferies analyst John Janedis wrote in a report: "The deal will receive intense regulatory scrutiny."

When asked for the reasons behind the stock's drop, MoffettNathanson analyst Michael Nathanson offered yet another reason, saying "folks don't like the AT&T stock."

Drexel Hamilton analyst Tony Wible in a report on Monday morning wrote about Time Warner: "We maintain our "buy" rating until we can evaluate the deal's arbitrage spread, probability of closing and potential for other bidders." He raised his price target to the proposed deal price of $107. Asked by THR why the stock was down, he said: "The arbitrage spread referred to in my note is just that point. It’s the uncertainty that surrounds it and the chance factors may emerge that could derail it."

AT&T's stock was down around 1.5 percent in morning trading, with some analysts questioning the rationale behind the deal. Nomura said the deal was "puzzling," while MoffettNathanson's Craig Moffett called it "large and complex." Cowen analyst Colby Synesael even downgraded his rating on AT&T's stock to "market perform," saying the deal "creates new concerns."

Wrote Synesael: "We disagree with the logic behind the acquisition of Time Warner based on the 1) increased financial risk profile (i.e. leverage), 2) likelihood of enhancing strategic value, and 3) risk of the deal being approved. At the very least the deal will likely 1) force investors to reevaluate their thesis, 2) distract management from the core business, and 3) make it uninvestable for many investors thru 2017."

Amid all this, entertainment sector stocks had a mixed start to the new trading week. Walt Disney's stock, which over the past year has traded between $86.25 and $120.65, was up 0.7 percent at $93.67. 21st Century Fox was down 0.9 percent at $25.60. Its 52-week trading range is $22.66-$31.40. Viacom's stock, which has traded in the $30.11-$53.35 range over the past year, was up minimally at $37.52, while CBS Corp. shares also rose minimally percent to $57.73, compared to their 52-week range of $41.36-$58.35.

NBCUniversal owner Comcast saw its stock rise 1.7 percent to $65.12, Discovery Communications was unchanged at $26.64, Scripps Networks Interactive dropped 0.2 percent to $65.83, and AMC Networks rose 1.3 percent to $51.45.

Much discussion focused on a possible new deal wave that could hit the industry. CFRA analyst Tuna Amobi told THR: "We wouldn't be surprised if the deal triggers another wave of M&A activity within the space  possibly extending beyond the U.S. border  in the "rat race" for incremental economies of scale."

FBR analyst Barton Crockett also said in a report on Friday that the AT&T deal for Time Warner "seems to add to a clear ripening of conditions for a potential new wave of content consolidation."

And Crockett wrote: "We would see an opportunity for the full range of content companies to be seen as potential targets, from smaller entities like Lionsgate, to larger players like Disney and Netflix. There would have to be a bias against expecting acquisitions of family-controlled content companies like Fox, Viacom/CBS and Scripps. But we wouldn't rule out anything."

He added: "One obvious question would be whether Verizon would follow suit. It has taken small steps into content with Go90, AO and a proposed Yahoo deal. Verizon could do more. There has been meaningful exposure on CNBC for an Apple analyst's argument that Apple should make a push into content. Clearly, Amazon every day is validating the notion of original content helping an ecosystem and boosting consumer engagement. Video is becoming the leading driver of ad growth in social media and on Facebook, while Twitter and Yahoo have experimented with airing NFL games."

But others don't predict a slew of entertainment deals to follow. "I see no other deals on the back of this," MoffettNathanson analyst Michael Nathanson told THR. "It might help reinforce the logic of CBS and Viacom. That's it. Now there will be two large vertically integrated companies and Disney/Fox. The rest of the sector is small and too ad dependent."

Guggenheim Partners analyst Michael Morris in a Monday report spoke of "merger mania," writing: "As third-quarter earnings reports begin this week, M&A considerations will likely continue to dominate sentiment. Initial press reports of the now formalized AT&T/Time Warner merger discussions have spurred incremental interest across the media space, on what we view as a somewhat superficial renewed interest in “content.” We see numerous attractive qualities in Time Warner (industry-leading film and television production capability, global networks platform, branded content at HBO and Turner, efficient ownership structure) that are unique relative to peers. We don’t believe that any other media company in our coverage universe brings all of these qualities to a potential partnership."

BTIG analyst Richard Greenfield said a Friday jump in entertainment stocks amid AT&T-Time Warner deal chatter was misguided. "As speculation around the AT&T Time Warner transaction built on Friday, legacy media stocks all surged. The initial reaction was who is next (to be acquired) as content and distribution vertically integrate," he said. "We believe that read-through is incorrect."

He continued: "In reality, legacy media stocks should have declined as Time Warner’s sale is signaling impending danger for all. AT&T is not buying Time Warner for its basic cable networks. AT&T is buying Time Warner to get at its content creation engines Warner Bros and HBO, with HBO one of the only legacy media assets to establish a direct-to-consumer business (HBO Now). Time Warner refused to separate Turner from HBO and Warner Bros (link), and they appear to have found a buyer in AT&T who is willing to buy the whole thing to get at what they really want (HBO/Warner Bros) and use Turner as a cash machine (akin to their acquisition of DirecTV)."