Ever since U.S. telecom behemoth AT&T Inc. T has agreed to acquire media giant Time Warner Inc. TWX in a cash and stock deal worth $85.4 billion in Oct 2016, the industry circle has been rife with speculations of whether the deal will get a regulatory approval. There are two potential government groups that might have a say in whether the deal goes through: the telecom regulator Federal Communications Inc. (FCC) and the Department of Justice (DOJ).

Out of these two regulatory bodies, the FCC is the more conservative one as it has a broad mandate to review the transaction and may ask for detailed information, for an in-depth antitrust investigation. The FCC can easily stop a merger deal citing conflicts to the public interest. Meanwhile, the DOJ has never stopped any merger proposal of companies from unrelated fields. The merger is expected to be completed by the end of 2017.

Recently, both AT&T and Time Warner pointed out that the FCC can review the deal only if any FCC-given license of Time Warner is transferred to AT&T in connection with the transaction. Time Warner only has WPCH-TV, a broadcast TV station, and a few smaller licenses under purview of the FCC. Both the entities currently anticipate that Time Warner will not need to transfer any of its FCC licenses to AT&T in order to continue conducting its business operations after the closing of transaction. Furthermore, Time Warner has been looking to transfer or sell its licenses to another broadcaster.

AT&T’s management expects the deal to be accretive to both adjusted earnings and free cash flow, in the first year post closure. The company is likely to achieve cost synergies of $1 billion per annum within the first three years of the merger. It expects the deal help to diversify its revenue mix, lower capital expenditure and reduce regulatory restrictions.

Staying Ahead of Competition

Traditional telecom and pay-TV operators are facing severe competitive threat at present. Large tech and Internet firms like Alphabet, Facebook and Amazon are foraying into the telecom-media space armed with massive financing. Even within the industry, cable TV giant Comcast Corp. CMCSA became a media mogul after acquiring NBC Universal in 2011. The company is set to enter the wireless field in mid-2017.

Verizon Communications Inc. VZ took over AOL to target the lucrative online advertising market and its impending acquisition of Yahoo Inc. may provide the company access to world-class online content. In light of these developments, we believe AT&T’s decision to acquire Time Warner will position it competitively in the changed market condition.

Price performance of AT&T

In the last three months, the stock price of AT&T has gained 4.35% compared with 8.26% gain of the Zacks categorized U.S. Wireless National Service Providers industry. Nevertheless, AT&T is diversifying its businesses significantly. Last year, the company has become the largest pay-TV operator after its acquisition of satellite TV behemoth DIRECTV. Moreover, AT&T already has a strong presence in Mexican wireless market and several Latin American pay-TV markets. The proposed merger with Time Warner will provide AT&T a portfolio of lucrative contents. Time Warner's media empire includes HBO and Turner Broadcasting, which has the rights to sports telecasts.