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The Mechanics Of The AT&T-Time Warner Deal Explained

AT&T Inc. T 0.87% announced over the weekend that it had entered into an agreement to acquire 100 percent of Time Warner Inc TWX 2.78% in a combination cash-stock deal that valued Time Warner at $108,7 billion or $107.50 per share.

Loop Capital’s David W. Miller maintained a Buy rating on Time Warner, while raising the price target from $96 to $107.50.

According to the terms of the agreement, Time Warner’s shareholders will receive $53.75 per share in cash and $53.75 per share in AT&T stock.

“The stock portion will be subject to a collar such that TWX shareholders will receive 1.437 T shares if T’s average stock price is below $37.411 at closing, and 1.3 T shares if T’s average stock price is above $41.349 at closing,” Miller explained.

The purchase price suggests total equity value of $85.4 billion, with a total transaction value of $108.7 billion, inclusive of net debt.

Regulatory Heat Likely

“While TWX investors will clearly celebrate today, one angle that investors may not be considering right now is the future position of both the Department of Justice (DOJ) and the Federal Communications Commission (FCC),” the analyst stated.

Miller explained that since the AT&T and Time Warner merger would be a vertical one, the combined entity might need to agree to various concessions in order to meet the closing conditions,

However, these concessions could potentially alter the value of the deal and could include clauses such as not pursuing “predatory pricing” on Turner affiliate negotiations with competing MVPDs, “not positioning competing entertainment networks at a high channel number”, and not creating a “toll road” for over-the-top systems.

DateFirmActionFromTo
Oct 2016Evercore ISI GroupDowngradesBuyNeutral
Oct 2016Atlantic EquitiesDowngradesOverweightNeutral
Oct 2016Moffett NathansonDowngradesBuyNeutral

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