TWX Time Warner Inc. New

By Thomas Gryta 

AT&T Inc. can add Wall Street to the list of parties skeptical of its $85.4 billion deal to buy Time Warner Inc.

Shares of Time Warner fell 3.1% to $86.74 on Monday while shares of AT&T decreased 1.7% to $36.86.

The Monday price of Time Warner, trading about 18% below the deal value, means the market is figuring about a 40% chance that the deal will be approved, one arbitrage fund manager, who declined to be identified, said Monday morning.

"There is a litany of things to worry about," said analyst Craig Moffett with MoffettNathanson. "The deal faces a steep uphill climb in Washington, and it obviously isn't helped by the fact that both the Republicans and the Democrats have now come out against it."

After the announcement of the transaction during the weekend, lawmakers, media rivals, and politicians -- including Republican presidential nominee Donald Trump and Democratic vice presidential nominee Tim Kaine -- came out against the deal, calling for intense regulatory review of concerns that it could hurt consumers and concentrate too much media influence in one company.

Positioning the deal as the marriage of Time Warner's robust content lineup with the carrier's millions of wireless and pay television subscribers, AT&T Chief Executive Randall Stephenson has argued that as a vertical combination, the deal won't trip some of the antitrust triggers at the Justice Department.

"We're convinced that these type of issues can be handled with conditions," Mr. Stephenson told analysts Monday.

But it isn't just the regulatory overhang that is concerning Wall Street, which also called into question the industrial logic of such a deal.

"We historically have not believed in the strategic benefits of vertical integration," Citibank analyst Jason Bazinet wrote in a note to clients. He cast doubt on the idea that owning a fixed or mobile network provides media companies with better data to customize their content, along with new advertising and distribution opportunities beyond the traditional pay-TV model.

AT&T's Mr. Stephenson said owning content would make it easier for the carrier to adapt to various platforms quickly in a way that is time-consuming and difficult when it has to negotiate contracts with content partners.

"It's slow, it's painful, just the contracting itself takes a lot of time whereas when it's completely owned, you just move a lot faster," he said Monday.

Analysts note that many of the attractive aspects of owning content -- such as keeping it out of the hands of other distributors or giving it free distribution -- would be barred by regulators.

Still, not all investors have those concerns. By acquiring a media company, AT&T should be able to diversify its business while generating substantial free cash flow, said Jason Abercrombie, a credit analyst at Newfleet Asset Management, which has about $11.2 billion assets under management. The deal is a way for AT&T executives to "hedge their bets" in an uncertain environment, Mr. Abercrombie added.

Wells Fargo analyst Jennifer Fritzsche said the deal should give AT&T leverage against competitors, such as Comcast Corp., along with Amazon.com Inc. and other over-the-top players who own content.

Comcast's acquisition of NBCUniversal went through in 2011 with 13 months of review, but some officials have expressed concern that some of the conditions of the deal were difficult to monitor and enforce.

Laura Martin, senior media analyst at Needham & Co., said regrets about approval of the Comcast NBCUniversal deal are creating an overhang. "It's 100% the regulatory spread," she said, referring to the dip in Time Warner shares.

Antitrust authorities have taken a hard stance against deals and the timing of this one -- coming two weeks before a presidential election -- is confusing for many.

One arbitrage trader said Time Warner's share price Monday translated to the market putting a 40% chance on approval. Another said the regulatory unknowns are making it difficult to formulate a trading strategy that won't pay off for another year.

Wall Street also is taking a hard look at other aspects of the deal. They range from how it swells the carrier's already large debt load to how it could take resources away from its wireless network to how it could distract from integrating satellite-television provider DirecTV, which it bought for nearly $50 billion a year ago.

As part of the deal, AT&T -- already the largest nonfinancial corporate issuer of dollar-denominated debt -- is taking on $40 billion of bridge loans, adding to its current $119 billion in net debt.

Ratings companies Standard & Poor's and Moody's Investors Service both put AT&T on review for downgrade, though both said any downward move would be only one notch, meaning AT&T would maintain its investment-grade rating.

But it leaves the company with little room to add new debt because investors would get spooked having such a large balance sheet so close to crossing over to junk-bond status, Moody's analyst Mark Stodden said.

Mr. Stodden said the deal will give AT&T additional scale, more growth potential and lower capital intensity, but a likely rigorous regulatory review could include conditions that undermine AT&T's ability to use Time Warner's content as a competitive advantage.

The carrier also said the deal won't change its network-construction spending although it may have to spend more to keep up with the increased network load.

Mr. Stephenson said AT&T is prepared. It has 40 megahertz of unused airwaves -- almost a quarter of its total holdings -- that it plans to deploy specifically for video. The carrier also is participating in a continuing government auction of wireless airwaves.

"The more AT&T focuses on diversifying away from wireless rather than investing in it, the more we like the position of the challengers," said Jonathan Chaplin, an analyst at New Street Research.

Ryan Knutson contributed to this article.

Write to Thomas Gryta at thomas.gryta@wsj.com

(END) Dow Jones Newswires

October 24, 2016 17:19 ET (21:19 GMT)

Time Warner (NYSE:TWX)
Historical Stock Chart
From Mar 2024 to Apr 2024

Time Warner (NYSE:TWX)
Historical Stock Chart
From Apr 2023 to Apr 2024