AT&T – Time Warner Deal Looking Increasingly Likely

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The odds of AT&T‘s (NYSE:T) proposed $85 billion merger with Time Warner (NYSE:TWX) going through appear to be increasingly favorable, with the new FCC Chairman Ajit Pai indicating this week that the regulator does not expect to review the deal on account of a transaction structure which is likely to avoid the transfer of broadcast licenses. Time Warner is expected to offload some broadcast licenses (mostly radio licenses) and one TV station, after which it would not fall under the jurisdiction of the FCC. This means that AT&T would only require clearance from the Department of Justice, which is currently reviewing the deal. AT&T has been positive about obtaining approval, indicating that it expects the deal to close by the end of this year.

The markets also appear to be more optimistic about the deal’s prospects. AT&T’s offer is valued at $107.50 per Time Warner share, marking a $28 premium over the closing price before reports of the deal emerged. We can get a sense of the implied probability of the deal being approved by looking at the ratio between the actual appreciation of TWX stock to the premium offered. This ratio has risen from roughly 26% shortly after the deal was announced to about 70% currently, driven by the continued appreciation of TWX stock. While this is certainly not a perfect measure of the deal’s probability of success (the long timeframe to close and the 50% stock component also influence the discount), it does give a fair indicator of investor optimism.

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