UBS Calls It: The Time Warner, AT&T Deal Will Happen

Time Warner Inc TWX and AT&T Inc. T are expected to gain regulatory approval and finalize their merger by the end of the year — but that doesn’t necessarily bode well for Time Warner investors.

Viewing little potential upside and balanced risk-reward in light of the deal terms, UBS downgraded Time Warner stock to a Neutral rating on Monday with a $108 price target. Despite the adjusted rating, annual estimates remain unchanged.

The Deal's Promising Fate

UBS is heartened by the precedent set by the Comcast Corporation CMCSA–NBCUniversal approval and the innocuous nature of Time Warner’s vertical integration deal.

Analysts are also encouraged by the likelihood of bypassing FCC review — a measure evaded as long as Time Warner does not transfer its FCC licenses to AT&T. The commission chairman acknowledged that the deal will not likely be presented before the board.

The Pros And Cons

The completed deal would give rise to both upsides and downsides.

“Positives for passing regulatory review would be that TWX and AT&T do not compete with each other in wireline and wireless and AT&T's minimal content investments suggest little change in media concentration,” UBS analysts wrote in a note. “On the negative side, the combined company would have even larger size and scale, which might require a consent decree to ensure fair treatment of competitors.”

Concerned by the risk of a $500-million break-up fee, UBS also noted the importance of Time Warner remaining within its operating budget throughout the year. So far, the company is on course to meet guidance.

A Just Rating

Analysts consider Time Warner well positioned among media competitors due to its leading stance in film and television, expansion of international cable networks and position with HBO premium services.

“Our bottom-up analysis of Warner Bros.' theatrical slate shows the potential for improved profitability going forward,” they wrote.

Contributing to this potential are the inclusion of Turner networks in Hulu’s base tier, the high rank of HBO Now among paid iOS apps, possible participation in mid-priced bundles and a 13-percent affiliate-fee growth for the year.

Time Warner shares were trading down 0.46 percent Monday around $98.28.

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