Champagne corks may be popping in Dallas today, but on Wall Street the party does not include AT&T. Shares of Time Warner are higher, and so are those of T-Mobile and Sprint, but AT&T stock slid more than 5% following news that Judge Richard Leon has ruled in AT&T's favor, clearing the way for the company to buy Time Warner for $85 billion.
Some investors expect T-Mobile and Sprint to benefit from AT&T's victory in federal court. The Justice Department sued to block the merger of AT&T and Time Warner, and its arguments were ultimately rejected by the court.
Will this dissuade antitrust regulators from trying to stop T-Mobile's purchase of Sprint? Analyst Scott Goldman of Jefferies thinks the answer is no.
"I think the deals (T/TWX and S/TMUS) are sufficiently different (vertical vs. horizontal merger) and enough time will have elapsed that the government’s black eye from the T/TWX loss will not have a material effect on whether it elects to oppose S/TMUS," Goldman said.
The selloff of AT&T stock reflects the heavy lifting that's ahead for AT&T as it works to grow earnings while servicing the debt it is taking on to buy Time Warner.
"The new AT&T will carry an astounding $249B of debt (inclusive of operating leases and postretirement obligations). ... And that leverage ratio will be supported by an EBITDA that is shrinking—yes, shrinking—on an organic basis. And, yes, that's true even with Time Warner included," wrote analyst Craig Moffett of MoffettNathanson.
Moffett said Time Warner will represent just 15% of AT&T's business, and the other 85% has some challenges. AT&T's wireless, consumer broadband, video distribution, and commercial wireline businesses have all reported revenue declines over the last year, he said. Moffett's price target for the stock post-merger is $28 per share.
"We believe that there will be continued erosion in each of AT&T's legacy businesses as the company doubles down on bundling (discounting.)," he said.
AT&T explained during the trial how it plans to offer discounted video bundles to consumers. For its wireless subscribers, AT&T's "skinny bundle" will be free, according to CEO Randall Stephenson.
"It’s called AT&T Watch, and it is a $15 bundle," Stephenson testified, according to BTIG Research. "It’s taking basically the sports programming out of DirecTV Now and getting a really skinny bundle that we can put out there for $15 to our customers. And interestingly enough, if you’re an AT&T wireless unlimited customer, we’re going to give that bundle to you for free."
Stephenson argued effectively that buying Time Warner is the best way for AT&T to compete with over-the-top content providers like Google, Facebook and Netflix. If he's right, AT&T's near-term pain as it works to service its debt could be offset by long-term gains as it streamlines its access to content and builds its advertising business.