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Closing the Deal With Time Warner Inc (TWX) Is a Must for AT&T Inc. (T)




Though the intended merger of Time Warner Inc (NYSE:TWX) and AT&T Inc. (NYSE:T) has been doubted more than once since the idea was first floated in October, CEO Randall Stephenson assured AT&T stock owners that, not only would the deal be done this year, it would be ushered through without so much as a review by the FCC (as it turns out, AT&T isn’t looking to garner Time Warner’s licenses).

AT&T T stock

Is he right, and more importantly, do owners of T stock still want the TWX deal to go through? AT&T has so much else on its plate right now, not the least of which is regulatory uncertainty.

As it turns out, not only is the pairing likely to win approval, AT&T needs it…badly.

Business Is Getting Tougher

On Friday, Stephenson said it bluntly, though accurately — wireless carriers are in an arms race. While he was specifically referencing the industry’s capability to deliver digital constant over a limited number of airwave frequencies, his assessment could just as easily apply to the mechanics of delivering a wireless service.

Case in point: On Monday, rival Verizon Communications Inc. (NYSE:VZ) announced it was re-introducing unlimited data plans, looking to garner (or recapture) wireless customers who have come to rely on handheld devices as media-delivery vehicles. AT&T will be forced to respond, which — one way or another — will stake money off the bottom line.

As T stock owners likely know all too well, there’s no room for give. Last quarter, the company’s revenue fell just a bit. Income fell considerably.

The rise in operating expenses is abated after factoring in amortization and merger-related, but in light of the fact that the acquisition of DirecTV in May 2014 was supposed to be a business building tool, anything but top-line growth is a disappointment — and a reflection of an increasingly competitive space.

Is Time Warner the Answer?

In other words, as wireless telecom service increasingly becomes a commodity and, as a result, becomes less profitable, what’s AT&T to do to rekindle growth?

Whether it’s the best use of time and money remains to be seen, but the telecom giant believes the acquisition of video and music company Time Warner is the next best step.

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Those plans were unveiled in October, with mixed responses. While investors love the idea of melding a studio with a new distribution channel, consumers and regulators were a bit more skeptical. The concern lies in the fact that such a pairing would give AT&T not just control of how we consume media (AT&T is the nation’s second-biggest wireless provider and third-biggest broadband service provider), but what media we even have access to. Time Warner is the parent of several key television channels including HBO and CNN, as well as studio Warner Bros.

Though it’s technically a vertical integration and would theoretically be a mere coincidental pairing of content creation and content delivery, the opportunity for unfairness is undeniable even though pairing the media and the messenger would create efficiencies. Stephenson doesn’t believe the union violates any antitrust standards, however, and not just because the team-up wouldn’t include Time Warner’s licenses.

And if last quarter’s results for Time Warner are any indication, owners of AT&T stock should be hoping the deal goes through. In its fourth fiscal quarter of 2016, the company earned $1.25 per share on revenue of $7.89 billion. Analysts were only looking for a profit of $1.19 per share and a top line of $7.75 billion. Both figures were up by double digits versus year-ago comparisons, and the Q4 report extends a long and pretty reliable string of growth.

In other words, AT&T could use what Time Warner’s got.

Bottom Line for AT&T Stock

The good news is, the merger with Time Warner is apt to proceed as planned, and that’s coming from a former FCC commissioner. The vertical-integration nature of the pairing rather than a horizontal one is the key.

While the philosophical concerns of a potential monopoly aren’t without merit, legally speaking, AT&T is right… there’s no specific reason to assume that the company will abuse its relationship with a studio by limiting access to third-party entities. It’s certainly pushing the envelope though. It’s unlikely that antitrust law foresaw where communications technology and choice was going, with the lines between medium and media being this blurred.

Either way, AT&T wants, and needs, this deal to get done.

As of this writing, James Brumley held a position in AT&T (T).


This article was written by James Brumley for InvestorPlace on Feb 17, 2017.

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