Analysts cut Time Warner, AT&T targets following DOJ lawsuit

Following the news that the U.S. Department of Justice is suing to block AT&T (T) and Time Warner's (TWX) merger deal, several Wall Street analysts lowered their price targets for both names. Nonetheless, Baird analyst William Power argued that he sees the merits of the antitrust case favoring AT&T. DOJ LAWSUIT: Yesterday, the U.S. Department of Justice announced that it is suing to block the deal agreed to between AT&T and Time Warner. Commenting on the news, AT&T's Senior Executive VP and General Counsel David McAtee II said the DOJ lawsuit is "a radical and inexplicable departure from decades of antitrust precedent." He added: "Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently. [...] Fortunately, the Department of Justice doesn't have the final say in this matter. Rather, it bears the burden of proving to the U.S. District Court that the transaction violates the law. We are confident that the Court will reject the Government's claims and permit this merger under longstanding legal precedent." PRICE CUTS: In light of the news that the DOJ will be suing to block the merger, Wells Fargo analyst Marci Ryvicker lowered her price target for Time Warner to $84 from $100 to reflect its standalone value. Looking at Time Warner purely on fundamentals, the analyst told investors that she is not totally sure 2018 estimates are accurate given that the company has given no sense of trends for next year. While Ryvicker acknowledged that many investors have asked what Time Warner is worth, she does not think anyone steps in for it. The analyst reiterated a Market Perform rating on Time Warner's shares. Her peer at Barclays also cut his price target for Time Warner to $92 from $107. Analyst Kannan Venkateshwar argued that the DOJ move "in effect goes against almost 40 years of judicial commentary and action and, therefore, is quite unprecedented." Based on past DOJ frameworks, the analyst believes it may be tough for it to establish competitive harm, but the companies are likely in a 4-6 month period of litigation that should delay not only the closing of the deal but may also "chill other M&A activity across the space." Absent a deal, Venkateshwar estimates Time Warner could trade at $77 per share. Meanwhile, Nomura Instinet analyst Jeffrey Kvaal lowered his price target for AT&T shares to $42 from $45 as he considers shares on fundamentals, while noting that he did not cut his target post the third quarter video miss given the pending deal. Nonetheless, Kvaal told investors he believes the shares have "room to run" with or without Time Warner. CASE MERITS FAVOR AT&T: Commenting on the lawsuit, Baird analyst William Power argued that the merger deal may be delayed, but is not dead. The analyst argued that with Facebook (FB), Google (GOOG; GOOGL), Amazon (AMZN) and Netflix (NFLX) now media forces, including in original content, he finds it difficult to believe that AT&T will be able to significantly raise pricing for the Turner properties or HBO and risk driving away current partners. Ultimately, Power believes the merits of the case favor AT&T. The analyst reiterated an Outperform rating and $42 price target on AT&T shares. PRICE ACTION: In morning trading, shares of Time Warner have gained over 1% to $88.79 while AT&T is fractionally down to $34.42 per share.