AT&T: The End Is Here

Summary

• The Wall Street Journal states the DOJ has AT&T’s acquisition of Time Warner in its crosshairs. The report states the DOJ is considering a lawsuit to stop the merger.
• I beg to differ. I feel the deal is a lock to be approved. There is precedent.
• Concerned current and prospective shareholders should keep calm and be patient. The news signals the end of the negotiations is near. In the following article, I make my case.

What happened?

The WSJ reported the DOJ has AT&T's (NYSE: NYSE:T) acquisition of Time Warner (NYSE: TWX) in its crosshairs. According to Seeking Alpha Breaking News:

“Time Warner has been halted after a 6.2% tumble on word the Justice Dept. is considering an antitrust suit to challenge AT&T's acquisition of the media company. AT&T has jumped 1% on the news. The DOJ is reportedly also in settlement talks with the companies that could lead to approval with conditions, the WSJ reports. But the department is preparing litigation in the case it does decide to pursue the matter.”

Here are my thoughts. If the DOJ were to file a lawsuit regarding the acquisition, this would be very bad news for the stock. Nevertheless, I'm not concerned in the least regarding the DOJ doing this. In the following sections, I will make the case that the DOJ will inevitably approve the acquisition for concerned dividend and income investors.

Current chart

Source: Finviz.com

There is precedent

Comcast's (NASDAQ: CMCSA) takeover of NBC Universal created a $30 billion media behemoth. The company now controls not only the content but how that content is delivered to customers.

Comcast is the No. 1 provider of video and residential Internet service in the United States. It acquired a 51% stake in NBC Universal from General Electric (NYSE: GE).

DOJ regulators were quoted at the time as being concerned about many of the same concerns raised against the AT&T and Time Warner merger. The DOJ was quoted as stating that an all-powerful Comcast might stifle competition from new online video competitors. Furthermore, they were concerned about customer price increases as well.

Nevertheless, the deal went through after Comcast agreed to certain conditions. The conditions included relinquishing management rights of its minority stake in Hulu. Hulu is co-owned by News Corp. (NWSA), Walt Disney Co. (DIS) and NBC Universal. It did take several months of negotiations, which provided fodder for several disparaging headlines prior to the deal being approved.

I expect the same for this deal. The DOJ is basically showboating at this time to ensure no one thinks it is giving a pass to AT&T. The move also improves its negotiating position with the threat of a lawsuit hanging over AT&T’s head like the Sword of Damocles! Classic Trump negotiating tactic! In the end, the deal will get done. AT&T will have to make some promises regarding being fair to other content providers and ensure there are no immediate price increases.

No vertical acquisition ever denied by DOJ

AT&T and Verizon (NYSE: VZ) are the two big bullies in the wireless industry. If these two companies tried to merge, the DOJ would shoot it down in a heartbeat.

Nevertheless, the wireless industry at present is fiercely competitive. Margins are being pressured due to commoditization of the product. I see this highly competitive environment as a positive for getting the Time Warner deal done.

The DOJ must take into consideration that the big telcos need to vertically integrate in order to survive. It's really a no-brainer that the deal goes through. Can anyone name a vertical integration of two companies that was not approved by the DOJ? I could not. Case closed.

President Trump's regulatory reform stance

President Trump has continuously stated he wants less regulation. Trump constantly states that for every new regulation, two old regulations must be eliminated. If the DOJ were to disapprove the deal, this would fly in the face of everything he has been espousing. I don't see Trump backtracking on his promise for less, not more, regulation.

Some have said Trump may stop the deal due to his hatred of CNN. I have no concern whatsoever that President Trump has an issue with CNN. In fact, I believe that is actually a positive for the deal getting done. Trump doesn't want to appear to be taking out his personal issues on the company. He will have to recuse himself, so to speak. So what are dividend and income investors to do?

Investor takeaway

Don't let the ominous headlines regarding the DOJ blocking the deal worry you. The deal will get done, although there may be a few bumps along the way. Everyone's situation and risk tolerance is different, so I can't make a blanket statement on how you should position.

Nonetheless, a not-so-famous quote by one of my investing role models, Peter Lynch, seems quite apropos at this juncture for current dividend and income investors in AT&T. Lynch stated:

"The key to making money in stocks is not to get scared out of them."

That is how I feel about AT&T right now. The report of a potential lawsuit from the DOJ seems ominous, yet is actually good news, in my opinion. This means the end of the negotiating process has begun. I expect AT&T and Time Warner to sign on the dotted line regarding the DOJ's demands in short order and get on with business. Case closed.

One thing I've learned over time is to do the exact opposite of how I feel. Over time, I've learned that often the exact time I threw in the towel marked the bottom in the stock. Being able to pull the trigger and pick up shares at the point of maximum pessimism in a stock is one of the hardest things to do in investing, I surmise. This is why I always advocate layering into a position over time to reduce risk. And always have dry powder ready if an opportunity arises. I believe that time is now for savvy investors.

Please use this information as a starting point for your own due diligence and consult an investment adviser prior to making any investment decisions. Those are my thoughts on the matter. I look forward to reading yours.

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Comments

[Kmasse]

Is the end still here?

[Rick82491]

Here we go again. Being an investor of both T and RAD I have gained experience in what happens when the DOJ gets involved in private acquisition of publicly traded companies.
Here is how it goes.
Blah, blah blah, blah,
6 months latter the DOJ responds with.
Maybe Blah blah blah blah,blah blah.
At least T will be paying more than a CD to wait a year or 2 until the DOJ decides on some crazy plan to make the deal worthless.

[Chuckx]

Except this one is already in the courts - RAD / WBA never even got there.

And this one is not gonna take a year.

[Bathman]

Holy cow! Simply Wall Street said, this stock T is way under value, the fair value is $45.45 base on all math calculation!
http://bit.ly/2jHoh1u

[rocketroj]

Many here who believed the T-TWX deal would sail through without any resistance under President Trump's administration should not be investing their own money.

http://bit.ly/2jq2ACQ

Much of the blame belongs with industry analysts and pundits that scammed retail investors with their done deal pontifications. Was even one raising a red flag? Would be interesting to see where the scammers were placing their own bets. Guess ML Rule 101 still holds true... individual investors are the grease that keeps the gears of finance turning.

[Curry3]

If you look at GE, T has a very similar situation of over leverage and too much debt

[rocketroj]

Yes, tough position in rising rate environment. GE lost their way after the failed Honeywell takeover. Got greedy and tried to steal HON instead of going for the win-win. Seem to recall GE trying to become more of a financial company and less of a inventor/designer/manu... of products valued by customers. All right before the top in financials and subsequent crash. Next they tried to become an energy company again at the top and just before the crash. ATT is showing the same failure trying to become a content company right at the top and just before the crash in the value of content.

I believe the root cause is poor top management. ATT top management is devoid of brilliant entrepreneur innovative engineer types. Company is run by accountants, lawyers and MBAs. Lacks vision for the future and instead buys companies when the smart money wants out. Treats those companies as cash cows while very slowly running them into the ground.

[Curry3]

T getting hammered!

[rocketroj]

The deader the deal the higher T rockets. At this rate we could be making a run at $38 next Friday. Sweet

[NeverBend]

First post from a lurker.

What are the synergies and economies of scale in this proposed merger?

David, can you keep me informed about your upcoming service? Thanks

N

[daustin97222]

TWX should add about $5B EBITDA, based on my arithmetic. Then T needs to manage the 800 pound gorilla in the kitchen: the debt.

[David Alton Clark]

NeverBend! One of the most satisfying events for an author is to have a lurker make their first comment on their article! Thanks for that!

And thank you for your interest! I am getting a tremendous response and working hard to get the service online as soon as possible. Hopefully by the end of the month or sooner. I will keep you in the loop. Take care N! David

[David Alton Clark]

No doubt Daustin! DAC

[tvpro]

T owns CNN. Trump hates CNN, so Trump hates T. Deregulation is off the table for T unless they give up CNN. Special set of rules apply to T mergers that are politically energized because a presidents disdain for CNN. DOJ will do anything to sink CNN, including hurting T. Wall Street knows it as does Main Street. T shares reflect the sentiment.

[User 48259324]

T is increasing its div not eliminating it. Guy Adami said T is worth 11x, which is 31 a share. I say the bottom is in.

[rocketroj]

TWX back to where it traded during July 2014. Why would anyone want to buy this flea bitten old dog. Time to do an Old Yeller.

Terminating the acquisition is the best action taken by our CEO ever!

[r cohn]

There are two prime factors effecting T's stock over the near term
1.T's dividend is safe at least thru 2018.T is trading at almost a %6 yield.The lower T goes ,the higher the dividend yield,so the dividend will increasingly act as support for T
2.The T/TWX deal. as I mentioned is hardly a lock.This currently is the main factor effecting ATT's stock
Twx s currently at 91.15 and T is at 33.00..That translates into a $10 spread.This large spread indicates one of two things .Either the deal is going to be delayed a significant amount of time> 3 months and /or the DOJ is going to impose requirements on the deal that are too onerous for T to accept.and the deal will fall apart
With the current $10 spread,the probabilities are only around %40 that the deal gets down
If the deal is cancelled, TWX will go down as the arb sell their holdings and T will go up as the arbs cover their short stock.How much is unpredictable ,but it could easily be %5-10 in both.
If TWX declines into the 80's without any announcement,it is probably a lock that the deal will be cancelled,since TWX would probably trade above 85 on its own without the deal .

Now if there an announcement that DOJ has reached an agreement clearing the deal.,there might be some more pressure on T stock price as more arbs put on the arb.

[jacksalmon]

The author got the title right. It is just that his exposition on why that is the case is completely wrong. The end is near because T(rash) has nowhere to go except relying on its core business. This will only lead to declining earnings. Despite its efforts, this management team cannot pull a rabbit out of the hat. Instead, it keeps extracting more garbage, which is why it is T(rash).

[AutoTech]

Mario Gabelli just unloaded a boatload of T shares --- ditto other media players.

Shares are stalled up here, momentum is busted - general market downtrend should drive it down to 27-28.

On a discounted cash flow basis it's maybe worth $22 (tops) --- by anyone's calc (example below)

http://bit.ly/2j9j0zj

[peapaw]

I got $27-$28, do I hear a bid for $25-$26. maybe $24.50? Oh now I see $22, do I have $20 even, anyone.....anyone....B...

[peapaw]

Bueller....Bueller??

[ijeff]

I'd love to know who all the fat cats were that had this information before the rest of us did!

[jacksalmon]

All this speculation about where T(rash) is heading is comical. There is no need to speculate. It is dead certainty that T(rash) will be headed to the $20s where its dividend, despite the fact that it is at risk, will keep it afloat. It will never go bankrupt, but it will never have any outsized earnings. It is pure garbage except for that dividend. So, collect a dividend that is at risk and never get any capital appreciation. That should keep it in the $20s for decades. No matter what they do, it backfires. They are clueless and adrift.

[conndarin]

sold VZ at earnings at 51. buying T on the way down b4 it heads to 51

[ShellVpower]

http://bit.ly/2j4QC1q

[ShellVpower]

I always avoid stocks that look cheap on 52 weeks level......look more like 5- 10 years....also that deal with billions of debt.....we are talking about all together close to $175B debt for AT &T ?? Dividend cut??? is a possibility now??

[rocketroj]

If support around $31.75 fails to hold we are headed for a 20 handle. Might be a little support at $28.75. Looks like strong support at $27.25.

Worst case we hit $23.75 which will be a strong buy signal and time to back up the truck and load it up for retirement. If you are 49, buying 10,000 shares will turn into $1M by the time you turn 65 without writing even one covered call, a penny increase in the dividend or even one penny increase in the stock. Let's pray for $23.75.

[rocketroj]

With the Time Warner acquisition terminated ATT could go either way. I believe it is good for T long term. That does not mean T will not drop as Mr Market realizes the big acquisition is dead.

If it drops like a rock I am ready to buy with both fists at $23.75
TWX is down $2.50 in the premarket back to last November's range. It could go to $87.50 before the bloodbath stops. Our big T is holding it's won.

[r cohn]

If the deal is terminated, arbs will have to BUY back ~ 100 m shares of T that they sold short as part of the arb.
How will such buying effect T's stock price?

[rocketroj]

Great point they were long TWX and short T to capture the imbalance. No wonder we closed at $33.44 after the news. Guess my dreams of loading up on T after a post buyout termination crash are just that... dreams.

If we don't make a run at $40 any time soon at least the dividend is secure. Should be able to double the yield with covered calls.

[Chuckx]

I was waiting for exactly this situation to add T. Pure rumor-mongering press manipulation, have gone through this many many times with mergers.

Also buy some TWX and then sell it in a week or so when some other writer gets used to manipulate the price the other way.

[Curry3]

I guess this wasn't the end lol