4 takeaways from the ruling on AT&T's $85.4B acquisition of Time Warner

June 12, 2018
Following several months at trial, Judge Richard J. Leon has ruled that AT&T, which owns DirecTV, can buy Time Warner roughly two years after the $85.4 billion agreement was originally struck. The US Department of Justice's argument that the deal would reduce competition in the pay-TV space—leading to higher prices for consumers—did not hold up. And Judge Leon did not put any conditions on the deal.

Above all, the ruling will likely result in a tsunami of consolidation in the industry that could make more odd bedfellows of TV channels, movie studios and the companies that distribute their content.

Here are four key takeaways from the verdict:

Competition, consolidation to heat up in media

New media entrants Facebook, Amazon, Apple, Netflix and Google (aka the FAANGs) all finished trading in neutral territory ahead of the verdict. Then it came, and nobody fell off a cliff in after-hours trading. A central tenet of AT&T's defense was that it's facing unprecedented competition from content-streaming services. The verdict will stiffen the competition between traditional distributors and the FAANGS. With net neutrality becoming a thing of the past on Monday, the advantage could go to traditional distributors like Comcast and AT&T—owners of not only much of the physical infrastructure of the internet, but also increasingly some of the top content.

Fox will win in duel between Disney, Comcast

Following the verdict, media stocks traded higher after hours, with Time Warner (NYSE: TWX) adding more than 4%. Meanwhile, 21st Century Fox (NASDAQ: FOXA), which will likely now become the object of an even more intense bidding war between rival suitors Disney and Comcast, added another 7%. The would-be buyers both traded lower after hours on that prospect, with Comcast (NASDAQ: CMCSA) shedding 3% and Disney (NYSE: DIS) dropping about 1.5%. Comcast may soon move to outbid Disney for Fox's non-core assets in light of the ruling.

AT&T + Time Warner = Massive

Certainly, the crux of the issue heading into the trial for regulators: AT&T's win has always meant that it will become a major player in the pay-TV space via its subsidiary DirecTV. The telecom giant already owns notable cable channels. Adding Time Warner’s holdings into the mix will give it control of the Turner Broadcasting System's stable of channels that includes CNN, TBS and TNT, in addition to HBO, the marquee cable network in the US.

A bright future for vertical mergers?

Investors certainly think so. Pharmaceutical benefits manager Express Scripts (NASDAQ: ESRX), the target of a massive vertical merger with health insurance provider Cigna, traded up nearly 5% after hours. Health insurer Aetna (NYSE: AET), which has struck a similar vertical deal with retail pharmacy chain CVS Health, added 3.2% after hours.

But the real deal to watch going forward is T-Mobile's $26 billion bid to combine with rival Sprint, reducing the number of major wireless carriers in the US from four to three. Investors also cheered their prospects of winning that challenge. Sprint (NYSE: S) dialed up some 3.6% after hours, while T-Mobile (NASDAQ: TMUS) added nearly 2%, as both stocks have priced considerable regulatory risk into the merger.
 

Related read: Comcast's acquisition of NBCUniversal is the precedent for AT&T-Time Warner

 

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