Time Warner Downgraded, Arbitrage Discount Related To AT&T Offer Has Shrunk

Brean Capital’s Alan Gould mentioned in a note that the arbitrage discount to the AT&T Inc. T to acquire Time Warner Inc TWX has shrunk from the high teens to 12 percent.

Gould downgraded the rating on Time Warner from Buy to Hold.

The AT&T Deal

“We note that AT&T shares are now above the upside of the collar so the deal is currently worth $109.29 in stock and cash, up from an initial value of $107.50,” the analyst stated.

Gould believes the deal would be approved, subject to certain regulatory conditions. However, if the deal were to fail, other bidders were likely to emerge, thereby putting a floor to Time Warner’s share price.

“The Turner networks are well positioned for an evolution to skinny bundles with 85-90 percent of the revenue generated by 4 networks and enough sports to make them must-have cable networks,” the analyst went on to say, while adding that “Warner has historically been the greatest content factory, both television and film, in the industry.”

Q4 Expectations

The Q4 2016 EPS estimate for Time Warner has been cut by $0.04 to $1.18, based on management having guided to a $0.06 hit due to another programming writedown at Turner, offset by higher earnings at the film studio.

Gould expects Warner films to gross about $1.2 billion globally during Q4, as compared to $655 million in the December quarter of 2015.

“The results are led by the $700+ million global box office of Fantastic Beasts and Where to Find Them, which has been particularly strong internationally,” the analyst explained.

The 2017 EPS estimate has also been lowered by $0.10 to $6.00.