What Happens to Time Warner If AT&T Deal Fails?

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If the federal government’s challenge foils the buyout of Time Warner Inc. (NYSE: TWX) by AT&T Inc. (NYSE: T), the entertainment and news company will be dumped back into a market that includes a more muscular Disney, a potentially merged CBS and Viacom, and a landscape in which it has become routine for new players such as Amazon and Netflix to produce their own content. In short, Time Warner management will need to spend more money and use more emerging distribution technologies than at any time in its history. To make matters worse, its stock will plunge to pre–merger agreement levels.

The U.S. Department of Justice has argued that the merger, worth $85.4 billion, would create a monopoly of sorts that marries content with the systems that deliver it. There is no way to know whether the government or AT&T will prevail in the legal battle. Time Warner management had better prepare for the worst and hope the best happens.

The buyout was announced on October 22, 2016. Time Warner’s shares jumped from $87 to as high as $103. Since the government challenge, they have dropped to $95. Investors should expect the stock to drop back to $87 or lower. If the deal is killed, Wall Street will need to contemplate whether Time Warner is worse off than when the buyout was first announced.

Walt Disney Co. (NYSE: DIS) is on the road to becoming much larger. It will buy many of the assets of Twenty-First Century Fox, including the studio properties and a number of cable networks. The price for the deal has been set at $52.4 billion. Also, two huge news and entertainment companies controlled by media baron Sumner Redstone may merge. CBS Corp. (NYSE: CBS) would combine its news operations with the cable properties and Paramount studios of Viacom Inc. (NASDAQ: VIAB).

Time Warner, on its own, would not only need to compete with several companies that are much larger than when the AT&T deal was announced. It also will need to battle Netflix, the largest streaming media company in the United States, and Amazon.com Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL) will want to conquer that same sector. Amazon and Apple are each prepared to spend hundreds of millions of dollars on original content. Both have cash on hand and strong enough earnings that they have almost bottomless piles of cash. And Amazon and Apple have networks of hardware that make the distribution of content more efficient. Many of the people who use these services drop their cable and satellite providers to consume content directly over the internet. Large units of Time Warner, which include CNN and HBO, will need to contend with the sharp change in the media consumer landscape.

Time Warner, by itself, will still be a big company, but many of its competitors will be larger, and some will have the balance sheet capacity to get larger in the industry very fast.