At The Black Swan Portfolio we recently had good success with the improved bid for NXP Semiconductors (NXPI, Financial) by Qualcomm (QCOM, Financial), which was a stale bid that subsequently improved. There is a bid that is similarly stale but with different dynamics that is very popular with gurus.
There are a total of 34 gurus invested in Time Warner Inc. (TWX, Financial).Ă‚
AT&T (T, Financial) bid $107.50 for Time Warner, which the company accepted. This situation is quite a bit more risky, as Time Warner and AT&T are fighting a Department of Justice lawsuit that could block the merger. AT&T believes it has been singled out for enforcement, citing as evidence statements by President Trump that the deal was bad for consumers. Trump has also expressed anger towards Time Warner's CNN because of its unfavorable coverage of his campaign and administration. Most recently, AT&T failed to convince a judge to force the U.S. Justice Department to disclose records of communications between the White House and government lawyers that detail Trump's views on the company's proposed $85 billion merger with Time Warner.
There are three reasons why I believe the government doesn’t have a good case:
In a comparable deal Comcast bought NBC.
Anti-trust regulation historically does not prevent vertical integration.
Over-the-top content distribution has been successful -- think Netflix (NFLX, Financial), YouTube and so forth.
With a comparable deal having passed, it seems strange if this one suddenly does not under an administration that prides itself on taking its foot off of regulations.
Anti-trust regulation wants to protect the consumer from monopolies. If a major telecom company wanted to buy another network, that would get looked at very hard. However, if a telecom provider wanted to buy something like WatsApp (if only they did), it wouldn’t get looked at very hard.
The trial begins March 19. It could take another year to ultimately get resolved.
There is about 15% of direct upside if the government doesn’t prevail, with Time Warner shares at $93. It could potentially be a little bit more if AT&T needs to sweeten the deal or simply because of quarterly dividends paid by Time Warner. The company pays quarterly dividends equal to an approximately 2% yield.
What if the government prevails?
If the government prevails, it isn’t necessarily the end of the world. Time Warner only trades at a 3.95% premium to its price prior to the AT&T bid. Over that time frame the Dow Jones Media Index advanced about 12% while the S&P 500 registered a total return of 30%.
Before AT&T, 20th Century Fox (FOX, Financial) wanted to acquire Time Warner, and there are quite a few analysts that believe Fox would come back in if Time Warner would draw down to the $80 range. All that interest helps to mitigate the downside risk here.
Conclusion
This appears to be another M&A event with limited downside risk and the potential to harvest a significant return in a limited amount of time. Be careful because the court case isn’t far away, but resolution could ultimately take much longer.
Disclosure: Author is long TWX.
