TWX: We Expect a Deal - Upgrading to Buy -- Pivotal Research

Following news last week that the Department of Justice would seek to block the AT&T acquisition of Time Warner, Time Warner stock fell from already low levels and has maintained a depressed valuation, reflecting a lack of confidence in the likelihood that a deal occurs. However, we expect that some kind of transaction will eventually occur, whether through AT&T litigating with the DOJ, divesting assets or through a sale to another media company in the event no deal with AT&T went through. As our underlying value of Time Warner on a stand-alone basis is around $81 on a YE2017 basis, at current levels the downside seems limited, and the upside to what we calculate as a $103 current value using recent trading levels of AT&T is significant considering our view that the transaction will ultimately occur. With more than 15% upside to current trading levels, we are upgrading the stock from Hold to Buy at this time.