Time Warner (NYSE:TWX) continues to trade at a huge discount to AT&T's (NYSE:T) offering price of $107.50 per share, which implies that the deal has a very low probability of being approved by regulators. The current differential of approximately $19, based on yesterday's closing value of $88.67, is more than a 20% discount. This means that there is the potential for a 20% return if the deal is approved.
Prior to the Presidential election, there were significant concerns that the Federal Communications Commission, led by Chairman Thomas Wheeler, would block the deal on grounds that it violated the net neutrality rules instituted by the FCC under President Obama. Net neutrality means that all internet service providers must allow all data providers equal access to their networks. AT&T was already in the FCC's crosshairs before the announced acquisition.
The FCC informed AT&T of its concern that AT&T was unfairly favoring its own content, offered through DirecTV, over other content providers. AT&T doesn't count the DirecTV content viewed by its customers towards their mobile data caps, which is called "zero-rating." The FCC claims that this practice obstructs fair competition, but AT&T argues that it is charging DirecTV for access to its networks in the same way that it is charging other data providers. The only difference is that AT&T owns DirecTV, so AT&T is really paying itself, which the FCC is not viewing favorably. Adding Time Warner's content to AT&T's line-up would give it an even greater advantage over competitors.
Following Donald Trump's victory in the Presidential election, approval of the deal looked even more unlikely, due to what President-elect Trump said days earlier while on the campaign trail:
"In an example of the power structure I'm fighting, AT&T is buying Time Warner and thus CNN-a deal we will not approve in my administration because it's too much concentration of power in the hands of too few."
Unsurprisingly, Time Warner stock fell to a post-acquisition announcement low of $85.22 the day after Trump's election win. Yet we must remember that Donald Trump said a lot of things during the campaign. He said that he would fire Janet Yellen, but now it looks like she will remain Chair of the Federal Reserve through the end of her term.
He said he was going to build a wall between the US and Mexico, but the wall now appears to be shrinking by the day. He said he was going to put a 45% tariff on all Chinese goods, which was never within the realm of possibility. He also said he was going to deport millions of undocumented immigrants, but he has now scaled that down to just the ones who have criminal records.
The most likely reason that Trump said he would block the Time Warner deal is because he was mad at how CNN, which is a subsidiary of Time Warner, conducted the first Presidential debate between himself and Hillary Clinton. He was also significantly behind in the polls at that time. Therefore, he wanted to punish what he considered to be a liberal wing of the main-stream media. This is how he operates. Now that the election is over and he has won, things are changing dramatically.
Trump's transition team has chosen Jeffrey Eisenach to redefine the future of the FCC and craft the administration's policies on issues like net neutrality. Mr. Eisenach's record speaks for itself. He is a staunch supporter of deregulation and "zero rating," a critic of net neutrality and FCC Chairman Tom Wheeler, and an outspoken advocate of telecom interests. It seems very unlikely that the point man for Trump's transition team would oppose this acquisition. To the contrary, he would bless it.
I think it is more important to watch what President-elect Trump does rather than listen to what he says. Trump's victory increased the probability that this deal gets done. The deal has a much better chance of being approved than what is being reflected by the current share price of Time Warner. As investors realize this, the gap between the current price and the $107.50 offering price will close significantly.
Disclosure: I am/we are long T, TWX, TWX LEAPS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.