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Yamil Berard
Yamil Berard
Articles (150) 

Investors Betting on Time Warner-AT&T Merger

Investors believe the government has a weak case in its antitrust suit to block merger

March 06, 2018 | About:

Investors who have been preparing for the big showdown between AT&T (NYSE:T) and the Justice Department over the takeover of Time Warner Inc. (NYSE:TWX) haven’t much longer to wait.

The early trial in the antitrust suit is expected to unfold in Washington D.C. in under two weeks.

In early afternoon trading on Tuesday, shares of Time Warner were up 0.48% to $95.04 a share. That may be sound cheap for a New York City-based entertainment company that AT&T is willing to pay $85 billion to acquire. But it’s more than what most gurus paid when they jumped at the chance to turn a contentious court battle into a money-making opportunity.

In the last three months, Time Warner shares have climbed by 5% to $92.63 a share. But gurus didn’t even pay that much. They jumped in when the stock plunged after the government announced plans to try to kill its deal with AT&T. Last November, Time Warner sold for $87.05 a share.

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In the fourth quarter, top buys included Seth Klarman (Trades, Portfolio)’s grab for 8 million shares, which hold 7.35% of space in his portfolio. David Einhorn (Trades, Portfolio)’s Greenlight Capital accumulated 665,000 shares, which sit in 1% portfolio space.

In a fourth-quarter letter to shareholders, Einhorn explained his new position. “Greenlight feels the government has a weak anti-trust case but even if they somehow win, shares are still cheap and the company has strategic options,’’ Einhorn wrote.

Greenlight purchased Time Warner at $89.72 a share, according to his letter.

Einhorn and Klarman were among the six gurus who loaded up on shares of the New York-based owner of HBO, CNN and TNT in the last months of the year. Others included David Abrams (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio) and John Hussman (Trades, Portfolio).

Just under a dozen gurus sold some Time Warner stock, but still held on to older positions. Daniel Loeb (Trades, Portfolio) reduced his exposure but held on to 2 million shares. Mario Gabelli (Trades, Portfolio) dropped 15% of shares but held on to 1.7 million shares. The guru has gained 13% since he began buying shares in the first quarter of 2015.

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Only one guru, T Rowe Price Equity Income Fund (Trades, Portfolio), sold out on shares of Time Warner in the fourth-quarter of 2017.

Time Warner

Time Warner has price-earnings ratio of 14.27 versus a median of 20.82. It has a price-book ratio of 2.59 versus a median of 1.85 and a price-sales ratio of 2.39 versus a median of 1.85.

Time Warner's dividend yield is 1.69% and it has a dividend payout ratio of 0.24.

It has a market cap of $73.77 billion. It has an enterprise value of more than $95 billion.

GuruFocus reports it posted $31 billion in revenue for the trailing 12 months. Its 12-month trailing earnings per share is $6.63. The stock's 52-week range is $85.88 to $103.90 per share.

Revenue growth is 4% over the last 10 years and operating income has grown by 12.6% in the last five years.

GuruFocus ranks it a 5 in 10 in financial strength and a 7 in 10 in profitability and growth. It rates a Business Predictability ranking under GuruFocus standards of one-star.

In his letter to shareholders, Einhorn emphasized a growth in company earnings during the merger process. Increases in subscriptions of HBO, for example, are aiding revenue growth. The company has suspended a buyback program during the merger, which was announced by AT&T in late 2016.

“We doubt the shares have much downside at the year-end price of $91.47,” he wrote in his letter to shareholders.


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