Law likely on AT&T’s side in Time Warner battle: analysts

An AT&T sign is seen outside a branch in Rolling Meadows, Illinois, U.S., October 24, 2016. REUTERS/Jim Young/Files

AT&T Inc. is likely to emerge victorious from a legal fight with the United States Department of Justice over its $85.4 billion acquisition of Time Warner Inc., analysts said in a series of research notes on Tuesday.

The Justice Department confirmed earlier hints on Monday by launching a suit against AT&T, arguing that the telecom carrier would use Time Warner’s content to force rival pay-TV companies to pay “hundreds of millions of dollars more per year for Time Warner’s networks.”

AT&T’s shares were down just 0.5 percent in premarket trading on Tuesday.

Time Warner’s shares were untraded. They closed on Monday some 18 percent below the implied value of AT&T’s $107.50 per share cash and stock offer, suggesting that investors have doubts about the company’s ability to close the deal.

“We are surprised at the lawsuit as there are decades of clear legal precedent on how these deals are handled,” Oppenheimer analysts wrote in a client note.

“We see a 75 percent chance AT&T wins at trial and the onus is on the DOJ to prove potential harm.”

The United States’ second largest wireless carrier offered to buy Time Warner in October last year to gain control of cable TV channels HBO and CNN, and film studio Warner Bros as well as a number of other coveted media assets.

AT&T has rejected DoJ demands that it sell DirecTV or Time Warner’s Turner Broadcasting – which includes news network CNN – in order to win antitrust approval.

The company, which expects to use Time Warner’s movies to fight off streaming companies Netflix Inc. and Inc.’s Prime Video, said the lawsuit was “a radical and inexplicable departure from decades of antitrust precedent”.

Analysts from another brokerage, Evercore, also backed the company’s chances in the fight.

“Based on our assessment of both the DoJ brief and the AT&T arguments, we believe that the law is likely on AT&T’s side,” they said in a note.

AT&T’s acquisition of Time Warner comes under the heading of vertical mergers – a deal between two companies that do not compete directly but operate on different steps in a supply chain.

“The last time the DoJ challenged a vertical case was in the Carter years; it was last successful under Nixon,” Nomura Instinet analyst Jeffrey Kvaal wrote in a note.

Aside from the Trump administration, the deal is also opposed by an array of consumer groups and smaller television networks.

The battle is Chief Executive Randall Stephenson’s second major run-in with the Justice Department after AT&T abandoned its $39-billion bid to buy T-Mobile USA in 2011 in the face of opposition from Obama administration regulators.

AT&T had planned to fight the government’s decision in court at that time, but later dropped the deal and swallowed billions in costs.

This time around AT&T seems to be more convinced of its case.

The company says it plans to ask the Washington court dealing with the case for the earliest possible hearing, hopefully within 60 days, as the current merger agreement expires on April 22, 2018.

“AT&T made it clear that they are ‘in this to win’ and don’t intend to cut their losses by walking away,” Morgan Stanley analysts wrote in a note.



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