Wall Street signaled skepticism on Monday that AT&T Inc would secure the government approvals needed to carry out its planned $85.4 billion acquisition of Time Warner Inc, with shares of both companies falling as analysts scrutinized the deal.
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Time Warner shares were trading some 20 percent below the implied value of AT&T's $107.50 per share cash and stock offer, indicating investor doubts that the companies would be able to complete the transaction.
The deal, announced on Saturday, would give AT&T control of cable TV channels HBO and CNN, film studio Warner Bros and other coveted assets and reshape the media landscape.
Dallas-based AT&T said on Saturday it would need approval of the U.S. Justice Department and the companies were determining which Time Warner U.S. Federal Communications Commission licenses, if any, would need to transfer to AT&T. Any such transfers would require FCC approval.
AT&T Inc Chief Executive Randall Stephenson said on Monday that he expects government clearances for the transaction, which the company sees closing by the end of 2017.
"While regulators will often times have concerns with vertical integrations, those are always remedied by conditions imposed on the merger, so that's how we envision this one to play out," Stephenson told CNBC in an interview.
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Despite its big media footprint, Time Warner has only one FCC-regulated broadcast station, WPCH-TV in Atlanta. Time Warner could sell the license to try to avoid a formal FCC review, several analysts said.
Shares of AT&T fell 1.5 percent to $36.92 and shares of Time Warner tumbled 2 percent to $87.50.
FOCUS ON APPROVALS
Wall Street analysts and traders on Monday expressed concerns about the implications of the antitrust and regulatory challenges facing the deal.
"From a regulatory perspective we believe management are relying heavily on the argument that vertical mergers have historically been approved, yet with so much up in the air in Washington, we find this riskier than would be typical," said Cowen & Co analyst Colby Synesael.
The deal, announced just over two weeks before the Nov. 8 U.S. election, is generating skepticism among both Republicans and Democrats.
The total value of broken deals is nearly $700 billion so far this year, a fact that has sidelined some investors.
"The regulatory environment has been unbelievable this year and I think everyone is on edge," said an arbitrage investor considering buying exposure to the deal who did not want to be identified because they were not authorized to speak to the press.
Among the biggest deals to fall apart in 2016 were: Office Depot-Staples, Baker Hughes-Halliburton, Allergan-Pfizer, and Norfolk Southern-Canadian Pacific Railways. Many of the deals drew objections from the Department of Justice and U.S. Treasury.
"We are unprepared at this point to assign anything higher than a 50/50 probability of deal approval," wrote MoffettNathanson Research in a report, downgrading Time Warner to "neutral" but raising its target price by $8 to $100.
Similarly, Credit Suisse lowered its rating on Time Warner to "neutral" from "outperform," but raised its price target to $107.50 from $90.
"We believe the value of the offer is full on current earnings and cash flow; that the probability of a counteroffer from a third party is low; and that the transaction will face lengthy scrutiny from regulators," Credit Suisse analyst Omar Sheikh wrote in a report. "We now see better opportunities elsewhere in U.S. Media."
By Jessica Toonkel and Supantha Mukherjee
(Additional reporting by Malathi Nayak and Carl O'Donnell in New York; Editing by Nick Zieminski and Meredith Mazzilli)