Acquisition Talks Boost Time Warner; Hit AT&T: ETFs In Focus

AT&T's (NYSE:T) global broadband and wireless network and Time Warner's (NYSE:TWX) wide presence in media platforms including television, film as well as digital base are to be merged in a $85.4-billion deal following regulators’ approval.

The purchase would bring AT&T’scellphone business, internet service and DirecTV as well as Time Warner’s leading media channels including HBO, WB film and TV studio along with its cable networks like CNN under one roof. Investors should note that Time Warner’s media business should get a considerable boost from AT&T’s internet services.

Inside the Deal

As per the terms and conditions, Time Warner shareholders would receive 14.4 ???15.7% of AT&T shares. The deal is expected to be accretive in the first year itself according to AT&T and would generate $1 billion in yearly cost synergies within three years of the deal closure.

Bloomberg indicated that “AT&T has commitments for a bridge loan of $40 billion to finance part of the cash portion of the deal. JPMorgan Chase & Co (NYSE:JPM). is contributing $25 billion of the financing, with Bank of America Corp (NYSE:BAC). providing the rest, according to a person familiar with the arrangement.”

Price Impact of the Duo

While speculation over the deal was doing rounds for last few days and started having an impact on share prices of the concerned companies, the formal announcement was made on October 22, 2016. Notably, on October 21, TWX shares jumped over 7.8% and T shares were down 3%.

Why AT&T Shares Are Falling

The slide in AT&T shares could be because the company “is overpaying for Time Warner”, as per an analyst. As per the report, AT&T’s cash-and-stock deal to acquire Time Warner values the media giant at $107.50 a share, up 20% from TWX’s closing price on October 20. Plus, the deal value goes up to $108.7 billion if we add up Time Warner's net debt, which seems an exorbitant amount to many.

Though the evolving trend of accessing media content via telecom, or watching programs on smartphones instead of television makes this acquisition quite meaningful, we would like to note that media business is down lately.

TWX has a Zacks Rank #3 with the Zacks Industry Rank in bottom 7%. The stock has a VGM score of ‘C’. On the other hand, AT&T has a Zacks Rank #3 (Hold) and a VGM score of ‘B’. Its Zacks industry rank is in the top 29% segment, at the time of writing. So, maybe, this is why some saw the merge price as pricey. The analyst also believes that “AT&T is still digesting its recent $50 billion mega-takeover of DirecTV.”

If these were not enough, the telecom company came up with an unimpressive Q3 earnings on October 22, wherein its earnings per share of $0.74 per share just about met the Zacks Consensus Earnings and the year-ago number while its consolidated revenues of $40.9 billion missed the estimate of $41.095 billion by a whisker. Revenues however increased 4.6% with the DIRECTV acquisition.

Does the Time WarnerDeal Have Long-Term Prospect?

Having pointed out the downside risks, we would like to note that if things fall in place, the deal may benefit shareholders over the long term. Perhaps all these acquisitions and initiatives will take their share of time to pay off fully.

AT&T seems quite keen on boosting its media exposure in recent times. Investors should also note that the telecom biggie expects to launch a streaming TV package, DirecTV Now, targeted at consumers who have cut off their cable subscriptions or were so long unsubscribed (read: Buy These ETFs on Netflix (NASDAQ:NFLX) Blowout Q3 Earnings).

ETFs in Focus

Needless to say, such a huge deal – and highlighted price performances – will invariably put ETFs heavy on AT&T and Time Warner in focus. Investors interested to take position on the basis of this deal could consider the ETFs mentioned below. These products could see elevated trading volumes ahead.

PowerShares Dynamic Media Portfolio ETF (V:PBS)

The fund gives exposure to U.S. media companies. TWX takes the second spot in the fund with about 5.60% weight.

PowerShares Dynamic Leisure and Entertainment Portfolio ETF PEJ

The fund looks to target U.S. leisure and entertainment companies. Here, TWX takes the fourth position with 5.60% weight (read: If Oil Continues to Soar, These 7 ETFs May Fall).

Vanguard Telecommunication Services ETF (MU:VOX)

This fund comprises U.S. telecommunication stocks. AT&T takes the top positon with 22.2% exposure (see all telecommunication ETFs here).

iShares Global Telecom ETF IXP

This fund goes global while offering exposure to telephone and internet products and services. AT&T has the top spot with 19.16% exposure.

First Trust Morningstar Dividend Leaders Index Fund (LON:FDL)

This fund gives exposure to a bundle of stocks with a history of dividend hikes as well as the ability to keep up the momentum. Here also, AT&T comes first with 9.46% weight (read: An Investor's Guide to Dividend Aristocrat ETFs).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>