There was no shortage of reporting last week on the long-awaited verdict for the U.S. versus AT&T (T) in its acquisition attempt of entertainment giant Time Warner (TWX), notes Chris Quigley, value investing expert and contributing editor to The Prudent Speculator.
The ruling brings together a global media and entertainment powerhouse and AT&T’s leadership in technology and its video, mobile and broadband customer relationships.
Candidly we do have concerns about the deal given the more than $84 billion price tag, as we don’t currently see significant value for AT&T by owning the content rather than acquiring distribution rights. There is obviously opportunity here, but the company has seen contraction in most of its business lines of late.
Nonetheless, we still think that AT&T shares are worth holding, but we will be keeping a close eye on how things transpire as with the additional debt costs and the fact that the Time Warner business is no larger than its slowing landline business, we want to ensure that the longevity of the current dividend is not disturbed.
Still, our target price for the stock is $45, as the stock boasts a very inexpensive forward (pre-deal) P/E of less than 10 and a 6.0% dividend yield.
The court’s decision also led to a lot of movement in the markets for content/communication company stocks as investors began to “bet” on what company might be the next target. That said, we all know that a few months back The Walt Disney Company (DIS) made an all stock offer valued at $52.4 billion for many but not all of Fox’s assets.
The deal included Fox’s movie studios, networks National Geographic and FX, Star TV, and stakes in Sky, Endemol Shine Group and Hulu, as well as regional sports networks.
Following the AT&T/Time Warner news, one of our other holdings, Comcast (CMCSA), challenged Disney by offering 21st Century Fox $65 billion of cash for those same assets, igniting fears of a bidding war, even as shares of both suitors defied conventional wisdom by posting sharp gains.
Comcast said the assets would increase its international footprint and boost its entertainment portfolio at a time when it’s facing pressure in its video business as more consumers cut the cord and turn to Internet-delivered video services.
While we can understand why both companies want the Fox assets, especially the international SKY assets, we will see if this eventual bidding war gets out of hand (as we fully expect Disney to up its bid and most likely add a cash component).
As we own both bidders, we won’t pick a side, though we will hope the game can somehow stay low-scoring! Our current target price for Comcast is $50 and for Disney is $142, so we think both stocks still have plenty of appreciation potential, no matter what happens on the Fox front.
We shall see what transpires over the coming weeks and months concerning this situation, but we would also not be surprised to see more merger action in the content-provider and content-delivery spaces.
One of our other core telecom holdings, Verizon (VZ) has been rumored to be looking for additional acquisitions, and with the lowered probability that the government might try to block potential asset pickups, we would not be surprised for Verizon to be actively on the prowl. Verizon trades for less than 11 times forward earnings estimates and yields a generous 4.9%. Our target price remains $64.
