We will maintain our $40 fair value estimate for narrow-moat AT&T (T) as on June 12, U.S. Judge Richard J. Leon ruled against the U.S. Justice Department’s blocking of AT&T's attempt to acquire Time Warner TWX for $85.4 billion.
While we weren't surprised by the ruling against the government, we were surprised there were no conditions attached. There have been many reports that AT&T's witnesses were doing a much better job on the witness stand and made a more compelling argument for the merger than the U.S. government, as some of their witnesses had to retract some of their claims on cross examination. We note that when Comcast (CMCSA) acquired NBC Universal, there were several restrictions attached including requirements to sell content to other parties and not to unreasonably raise prices. However, this time, no conditions were imposed and the judge stated: "If the Government were to ask me to stay this Court’s ruling … I could not, and would not, grant such a stay in the first instance." He went on to say that he hoped the government wouldn’t "use a stay to accomplish indirectly what could not be done directly."
We had anticipated that whichever side lost would file an appeal. However, with the judge's strong recommendations, we think a government appeal is now less likely, though the government has six days to file for a stay to prevent the merger. Assuming no stay is filed, the deal should close almost immediately after the six-day waiting period. The current merger agreement requires the deal to close before June 21, so it's possible that the deadline might be extended if the government files a stay.
We haven't been big fans of the deal and reiterate our view that we don't see significant value for AT&T by owning the content rather than acquiring distribution rights. We're also not fond of the price that AT&T will be paying for Time Warner. Nonetheless, we do not anticipate a significant change to our AT&T fair value estimate and continue to view shares as undervalued.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Allan C. Nichols, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.