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After Overhang Trade in AT&T, What to Expect in Valuation

Stock performance for the combined AT&T would subsequently improve, and even recover at least to levels logical on a fundamental basis.

TWX should be about 5-6% accretive for AT&T in their first year as a merged entity (and more after consolidation. Suddenly eyes will open to a more attractive valuation level for AT&T. It wouldn’t surprise me if T was 40-50 in a year or so, writes Gene Inger June 14.

I thought a drop to anywhere around 29-31 would be an attractive entry point (and so far, indeed is).

The idea of course was that if the deal was approved, arbitrageurs playing the Time Warner (TWX) vs. AT&T (T) spread would initially sell, and then the shares might rebound a bit, which you’ve seen.

After the deal closes, a large technical overhang might exist for a while, if TWX shareholders who don’t entirely grasp the transformation. It would enhance the value of tons of Time Warner contacts that do not bring CPM …cost per thousand …yields like existing AT&T contacts and customers do, but that would improve.

It’s possible some would sell holdings, hence the temporary overhang. And a worry that the DOJ might still intrude since some pricing arrangements with Time Warner properties must stay in place into next year. Some are critical of CEO Randall Stephenson for that, but it actually gives time to integrate.

Stock performance for the combined AT&T would subsequently improve, and even recover at least to levels logical on a fundamental basis.

That’s a higher level than where it is, even not considering a higher P/E multiple on a longer-term basis, if it’s valued as a media stock not merely telecom stock. If it’s viewed with a media multiple, it won’t be a widows and orphans stock for the coupon clipper crowd, a reputation it inherited from earlier days.

So, any shorts who are playing for the overhang trade lower should stay a bit nervous because they should have limited time (or price variation) for them to exit, lest they be run in when AT&T turns higher. That’s barring calamity in the general market of course.

In essence, after the deal’s close announced Friday (or perhaps at the next conference call with July’s Q2 earnings) I’d expect AT&T to outline the new transformation, as I have already explored content and distribution being cornerstones.

As a cynical investment community begins to understand how they’ll forge ahead, whether they put a higher multiple on it or not, until performance is able to show actual combined results ahead, the shares should gradually be able to improve. The Street and investors primarily own it solely for the dividend, and perhaps option-writing to create superior returns. We expect the $40 billion of share-overhang will grasp an error in fading AT&T beyond the initial arb-related drop. It could even run up a few points.

There is complete merger panic in media, as expected. And without trying to dissect the players I would like to offer a thought: a couple years from now fiber/digital/5G will completely have overwhelmed cable, satellite and conventional telecom, relegating all who don’t get-in-the-game 21st Century style, to low-multiple perdition.

You all know how Comcast CMCSA, Disney DIS, FOX FOXA or others are either bidding, in-play or figuring it out like Verizon tries.

That’s why AT&T transformed brilliantly and actually will be able to absorb the incurred debt smoothly over time, even if they sell holdings like in Latin America, though I doubt they’ll have to.

Of course, there’s a hiccup or two forthcoming, a part of all merger deals. But in their case, even after a year-long fight with the government I think they’re in a sweeter spot than competition, which will pay extremes to achieve combinations remotely similar to what AT&T already has done.

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