Expect Regulatory Scrutiny for AT&T, Time Warner Deal

Given the large 35% premium to the unaffected price of $79.25 (the close on Wednesday, Oct. 19), we believe that the Time Warner investor base will approve the deal. Despite passing the investor vote, we expect the proposed merger will receive a high-level of regulatory scrutiny and the probability of passage could depend on the outcome of the upcoming U.S. presidential election and any subsequent changes in personnel and/or philosophy at the FCC and the Department of Justice. We also think that the premium will also force out some potential counterbidders particularly, Twenty-First Century Fox where the stock price has slid over 25% since the firm made an unsolicited $85 per share bid for Time Warner in July 2014. While other rumored bidders like Apple or Google could potentially outbid AT&T given their larger cash balances and stronger equity, we don’t expect either firm to counterbid given their previous reluctance to buy Time Warner for well under $100 per share.

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